Forex Fundamental Analysis Reports

UK PPI Data Will Influence Interest Rate Expectations

Sterling will remain very sensitive to inflation data, especially as markets are expecting further interest rate increases. The producer prices impact will be curbed to some extent by the fact that the consumer inflation data is not due until next week.

The rise in energy prices is likely to put further upward pressure on input prices in the latest monthly data, following on from the 1.2% increase recorded last month. In this context, Sterling will tend to strengthen immediately if input prices rise by more than 1.3% over the month while a rise of 0.7% or less would tend to weaken the UK currency.

The Bank of England will also be watching the output prices data very closely and this data is liable to have the greater medium-term impact on interest rate expectations. The central bank is still very concerned that a rise in input prices will also lead on to higher output prices and maintain general upward pressure on inflation. A key first sign of success for the bank will be if companies are less able to pass on cost increases. The latest survey evidence has generally suggested that companies are still pushing prices higher, although pressures do not appear to have intensified.

A monthly increase of more than 0.5% in output prices and 0.4% for core output prices would reinforce fears that corporate pricing policies, allied with higher costs, are pushing overall inflation higher. This would increase the risk of further interest rate increases and provide short-term Sterling support. The UK currency will be vulnerable to significant selling pressure if core output prices do not increase over the month even if there is a robust input prices figure.

Investica