British Pound Rallies on Strong Inflation Numbers



CPI rise takes markets by surprise

The Office for National Statistics released the annualized consumer price index (or CPI) for July on August 18, showing an increase 0.1%. The CPI beat the forecasts, which suggested no change in existing levels. The core CPI was seen rising to a five-month high of 1.2%.

The increase in inflation was primarily driven by the clothing and footwear sector. The clothing and footwear sector inflation, which had seen an unusually steep fall of 0.2% in July 2014, saw a rise of 1.7% this July as the fall in prices this July was comparatively lower.

Pound to dollar pair breaks 1.57 intraday

The markets had a high positive bias to the inflation numbers beating forecasts. The strong inflation numbers drove the pound to dollar pair to 1.5720. The release of the US housing starts, which is the annualized figure of new houses which started construction last month, is at an eight-year high of 1.21 million. This means that some of the gains were shed.

Now the focus will be on the FOMC minutes, which were released on August 19. The pound closed the day at 1.5661.

Impact on the market

The iShares MSCI United Kingdom ETF (EWU) lost 0.27% to the market at day’s end. The WisdomTree United Kingdom Hedged Equity ETF (DXPS) was also seen trading with a negative bias and ended the day lower by 1.13%.

Banking ADRs (American depository receipts) were seen trading higher, as they tend to benefit with a possible interest rate hike, with HSBC Holdings PLC (HSBC) and Barclays PLC (BCS) rising by 0.28% and 0.23%, respectively.

Among other ADRs, ARM Holdings (ARMH) reacted negatively to end 0.35% lower. Rio Tinto PLC (RIO) also fell by 1.23%.

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