The pound rose on Wednesday following a surprise rise in UK inflation. The Consumer Price Index for the year leading up to July rose to 2.1% from 2.0% previously, analysts had expected annual inflation to cool slightly to 1.9%.
The surprise uptick takes inflation above the Bank of England’s target rate of 2.0% and in ordinarily times, central banks would consider raising interest rates to curb spending which in turn tends to strengthen it’s currency, but with a disorderly Brexit a distinct possibility the BoE have opted to take a wait-and-see attitude, promising to remain flexible to help the UK economy if necessary.
GBPUSD opened at 1.2056 and rose quickly to a high of 1.2095 following the strong CPI results, the rally ran out of steam as the dollar strengthed in the afternoon, the pair closed at 1.2068.
GBPEUR rose from a low of 1.0782 to reach 1.0821, after a slight lull in the afternoon, the pound resumed its climb and reached a high of 1.0834 as the session finished.
The US dollar and other perceived safe haven currencies rose on Wednesday as the US Treasury bond yield curve inverted for the first time since 2007 prompting fears of a global recession.
Normally a yield curve slopes upwards as investors expect to be compensated for the risk of holding longer term debt, an inversion takes place when the spread between 2 and 10-year treasuries drops below zero.
In the past yield curve inversions have been followed by recessions which is why investors took the news so seriously. UK Government yields also inverted for the first time since 2008, the curve in Britain inverted ahead of the recessions of 1980/81, 1990/91 and 2008/09. The dollar index which measures the US dollar's strength against a basket of 6 different major currencies rose to 98.04, the highest level in 2 weeks.
Eurozone GDP rose by 0.2% in the second quarter of 2019, matching the previous period and in line with market expectations. On YoY basis, GDP rose 1.1% in Q2, however GDP in Europe's largest economy Germany slowed to 0.4% in Q2 from 0.9%.
EURUSD opened at 1.1185 ad remained relatively stable for the majority of the day until a surge of safe haven buying in the afternoon meant the pair fell to 1.1138 as the session closed.
