British Pound Tanks as Softer PPI Suggests Weakness in CPI

The British pound was one of the few currencies to actually lose value against the dollar today. Disappointments in producer prices, leading indicators and house prices provide partial explanation as to why the Bank of England failed to up their degree of hawkishness following last week?s 25bp rate hike.

April input prices for producers fell 0.2 percent on an annualized basis and increased a less than expected 0.7 percent monthly. Even though annualized output prices were in line with expectations, core output price growth slowed from 2.8 to 2.3 percent. We indicated on Friday that the strength of the British pound should have reduced inflationary pressures and this was exactly what we saw today. Tomorrow, we have consumer prices due for release and we could see softer numbers there as well as consumers may benefit from lower prices on imported goods. Should we get softer numbers in CPI to go with this morning?s PPI release, rate hike expectations could drop sharply, which of course, would be bearish for the British pound. Aside from PPI, house prices also grew at a slower pace of 10.9 percent. This is a lagging indicator, but it does suggest that the UK housing market may be slowing.