Pound On The Rise
GBP has seen better buying across the European morning on Wednesday in response to the latest CPI data out of the UK. The Office for National Statistics released its January inflation report, showing that consume prices were firmly higher once again last month. The headline CPI reading was seen at 5.5% on the month, rising from the prior month’s (and expected) 5.4% reading. Headline CPI was also seen rising to 4.3% from the prior month’s 4.2%, beating expectations for a 4.3% result.
Fresh 30yr Highs in Inflation
With inflation edging up to fresh 30-year highs, the market remains firmly fixed on BOE tightening expectations. The BOE recently conducted its second consecutive rate hike, marking the first time it’s lifted rates in that fashion since 2004. Looking ahead, the BOE expected inflation to peak around 7.5% into Q2 (April), marking an upward revision from the 6% peak previously forecast in December.
Looking at the breakdown of the data, the largest upward contribution was seen coming from clothing and footwear which added 0.14% to the overall increase. Housing and household services came in second, adding 0.06%. On the downside, restaurants and hotels were created a 0.09% drag on inflation while transport costs also weighed on prices by 0.06%.
Supply-Side Issues Remain
One of the key drivers behind the ongoing lift in inflation is supply side issues. With these COVID and regulatory driven bottlenecks yet to resolve, the near term inflation outlook retains clear upside risks. Additionally, with energy prices still at highs, and the risk that gas prices might soar if Ukraine and Russia tensions boil over, consumers look set to suffer higher prices in the coming months. The key now will be in assessing whether the BOE was right in its inflation assessment or whether prices run higher than the 7.5% forecast for April.
BOE in Focus
If inflation continues to print above target each month, this is likely to be met with strong hawkish expectations in the market, translating into a higher GBP. However, BOE’s Bailey recently warned the market not to get carried away with its rate hike expectations. The market is currently pegging the next interest rate hike to take place at the May meeting with the scale of the expected hike likely to shift higher if inflation continues to soar in the meantime.
Technical Views
GBPUSD
Price continues to hold in a block of consolidation between the 1.3461 level and the bear channel top. With both MACD and RSI turning higher, the focus is on an eventual break to the topside with a move above 1.3676 the key trigger needed to encourage fresh bullish momentum towards 1.38 initially. To the downside, 13461 and 1.3349 are the key supports to note.
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With 10 years of experience as a private trader and professional market analyst under his belt, James has carved out an impressive industry reputation. Able to both dissect and explain the key fundamental developments in the market, he communicates their importance and relevance in a succinct and straight forward manner.