Daily FX Update – 18th September 2017

What a week last week was. GBP was handed almost nothing but boosts with positive manufacturing data and CPI surpassing 2.8% expectation, printing a joint five year high of 2.9%, sending Cable to initial highs over 1.3300 and pushing GBPEUR to recent highs over 1.1100. Whilst market reaction was clearly positive in anticipation of a rate hike, the reality and complexities of the situation potentially aren’t as straightforward. The Bank of England face the reality of inflation well above target and the prospect that current economic conditions can’t support a rate hike. A caveat to the positivity was Wednesday’s employment figures, which showed that while unemployment was at historically low levels, the gap between earnings and inflation was widening. Trends however are based on momentum, and even the more notably dovish members of the MPC are now singing the rate hike song and as it stands, GBP is in vogue in anticipation of a rate hike in November, but with a 6% move in 4 weeks taking Cable to above 1.3600 and its highest level in over a year, there is a strong argument to hedge against moves lower. Whilst the market in the short term is focused on the normalisation of monetary policy, longer term macroeconomic fundamentals shouldn’t be ignored and need to be closely observed.

Focus today turns to the EU with the release of its inflation numbers in otherwise a quieter day for data although attention will also be paid to Mark Carney’s speech to the IMF in Washington later.

Have a good day.

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