Pound Dives as Inflation Data Vastly Overstated

In what was an otherwise uneventful night of trade in the FX market, news that the UK Office of National Statistics made a serious error in its inflation data calculations rocked the pound which fell more than 100 points off session highs tumbling below the 1.8800 level.

UK's ONS slashed its estimate of annual inflation in export prices from 3.8% to 0.6% after it found an error in the calculation of its computer models. The downward revision in turn lowered ONS's estimate of growth in national income to 4.8% from 6.0% originally reported.

The fast growth in national income was singled out by BOE as a serious concern in the minutes of the latest MPC meeting leading currency traders to conclude that another rate hike was imminent. Tonight's news fully reverses that view as it shows that actual UK inflationary pressures are far tamer than originally thought.

The correction from ONS also dovetails with the position of MPC member David Blanchflower who stated yesterday that UK economy faced greater near term risks from a slowdown rather than inflation. As a result of tonight's revelation expectations of additional rate hikes from the BOE have been pared back significantly causing the pound to lose ground against the dollar, the euro and the yen.

In Japan today comments by Vice Finance Minister Hideto Fujii that euro's appreciation against the yen this year has been a "little rough", sent USD/JPY and EUR/JPY plunging 30 points within a minute of the news. This is the second time that Japanese officials have used such language to describe EUR/JPY movements and it suggests that the 150 EUR/JPY level represents the "Maginot line" for the pair that world's central banker do not wish to see crossed.

Tonight's positive economic news from Japan that Retail Sales climbed 2.0% versus 1.1% expected should make their job of jawboning yen higher a little easier. Although most analysts pointed out that a large part of the gain was the result of higher fuel prices, the overall pick up in retail activity bodes well for the possibility of further monetary tightening by the BOJ.

Japan's central bankers will not move on rates until they see clear, unambiguous evidence that Japanese consumers have finally abandoned their deflationary mindset and started to increase spending and today's data provides first tangible evidence of this change in behavior.