UK Inflation Not Really That Sterling Positive

Sterling extended its recovery from the recent slide that took its lowest level since July 17th yesterday against the dollar. It had already risen above yesterday's high near $1.64 by the time the unexpectedly firm CPI report was released which sent it near $1.65 (~$1.6479).

The consensus had looked for a 0.3% decline in July consumer prices that would have brought the year-over-year rate to 1.5% from 1.8%. Instead, the July reading was flat, leaving the year-over-year rate unchanged; still at its lowest level since September 2007.

However, the error did not lie with volatile components, like energy, food, alcohol and tobacco. Excluding these, which is what the UK regards as core, rose 1.8% year-over-year, up from 1.6% and the fastest in 8 months.

Yet the higher CPI will do UK households little good. The cost of leaving adjustments are tied to the Retail Price Index, not the Consumer Price Index and the RPI stands at -1.4%, up slightly from the -1.6% pace reported in June.

Earlier this month, the BOE extended its quantitative easing policy and Governor King has warned of short-term volatility in CPI below the 2% medium term target because of higher oil prices and smaller than expected decline in household utility bills. Inflation expectations, as measured by the 5-year/5-year forward. It peaked in late June near 4.6% and earlier this month dipped below 3.2%. However, over the last two weeks it has been basing and the risk is on the upside now, after the CPI data.

The next string of data also will likely point in that direction, aside from tomorrow's BOE minutes from meeting that decided to expanded the gilt purchases. Friday, the UK reports retail sales and money supply figures. BRC and John Lewis sales figures point to a small gain in July after an unexpectedly large 1.2% rise in retail sales. M4 money supply may have increased 0.2% in July after a decline of a similar magnitude in June.

A move above today's high in sterling, which corresponds to the 20-day moving would target $1.6520. Hourly momentum indicators warn that short-term traders in the US will be inclined to sell into early upticks if they materialize.