US Inflation Rises Over 2019, Weaker Over December

The US was treated to a rather mixed inflation report yesterday. The CPI figures for December came in with headline inflation rising 0.2% month on month. This reading was in line with expectations though marked a decline from the prior month’s 0.3% reading. Meanwhile, the core inflation reading, which strips out food prices and energy, was seen rising by only 0.1%. This was below both the expected and prior reading of 0.2%. In total then, inflation was seen rising at 2.3% annually over the year of 2019. Notably, this was the strongest rise in inflation for 8 years.

Among the big hitters in the components were gasoline prices, which rallied 2.8% on the month and 7.9% over the year. Medical care services also rose by 0.4% on the month and 5.1% on the year. This was followed by shelter costs, which rose by 0.2% on the month and 3.2% on the year. Food prices were also higher by 0.2% on the month and 1.8% on the year with apparel prices up 0.4% on the month and 1.2% on the year.

Despite the gain inflation over 2019 as a whole, the weakness in the December meeting means there is nothing here to warrant the Fed shifting from its current “on hold” status. With the US & China due to sign off on the phase-one trade deal today, however, conditions could start to pick up over the next six months which might raise the question of Fed tightening closer to the summer. The path of crude prices will be a key determinant of inflationary pressures which could start to rise quickly, if crude rallies again.

UK Inflation Weaker Than Expected

In the UK, December CPI came in weaker than expected at 0% month-on-month vs 0.2% expected. The annual figure for December was also weak at 1.3% year on year versus the expected and prior reading of 1.5%. The Office for National Statistics breakdown of the data showed that the largest contributions to CPI over December were housing, water, electricity, gas and other fuels which input 0.36%.

In terms of the gauging the reaction from the BOE, it is important to note that these figures once again reference the final pre-UK elections period and reflect the strength of the economy during a time of heightened uncertainty. That said, this will no doubt add to the weakened view of the economy that BOE governor Carney acknowledged in recent comments.

The BOE chief recently remarked that the anticipated post-Brexit rebound in activity might not happen as quickly as projected, if at all, and, in light of the low levels of growth in the UK economy, a rate cut might be necessary. Economists and traders are now speculating on the chances of a BOE rate cut before Carney ends his term in March. As such, forward-looking survey data sets, to be released this month, will be closely tracked by the market.

Technical View

GBPUSD ( Bearish, below 1.3220)

From a technical viewpoint. GBPUSD is sitting just above the yearly pivot at 1.2908, with the rising trend line coming in just below. With longer-term VWAP still positive, this region could still hold as support. A break below here, however, will bring the symmetry target at 1.2675 into play.

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