The latest economic data out of the UK this morning offered further endorsement top GBP bulls. UK CPI was seen rising by 0.7, year-on-year, in January. This was above both the prior and expected 0.6% reading and confirms that UK CPI is once again on an upward trajectory. Core inflation was also higher than expected at 1.4% versus 1.3% forecast.

CPI Trending Higher Again

There has been plenty of fluctuation and volatility in UK CPI since the pandemic began in March 2020. The initial recovery over Q2 peaked into the summer and then fell bac as social restrictions and lockdowns returned. Still, despite the return of a full, nationwide lockdown over recent months, consumer prices have seen upward pressure.

Recreation & Culture Biggest Positive Drivers

In terms of individual contributions, the report released by the Office for National Statistics showed that the biggest upward driver was recreation and culture which saw a 0.35% contribution. Following that, furniture and household goods, restaurants and hotels, food and transport were the next biggest winners, respectively. Meanwhile, the biggest downside drag came from clothing and footwear prices.

CPI To Recover Faster Over Q2

Looking ahead, the near-term outlook for consumer prices has plenty of upside risk. Given that, as of April, petrol prices will no longer be compared with pre-pandemic levels, the strong upside move in energy prices should see a firm lift in CPI over Q2. With restrictions looking likely to begin easing from Q2 onwards also, there is a strong likelihood that we see a steady increase in spending. Just last week we saw the BOE’s chief economist Andy Haldane citing the bank’s estimates that Britons have saved around £125 billion throughout the pandemic, a large portion of which he expects to be spent over the coming quarters as the economy returns to normal.

BOE: To Ease or Not To Ease?

Given this projected increase in inflation, the question then is what will the implications be for the BOE? The central bank has recently reaffirmed its view that the economy is due to recover over H2, meaning that it is happy to refrain from further easing at this point. However, BOE governor Bailey was keen to stress the uncertainty which remains and refused to rule out further easing, including negative rates. With this in mind, traders will be closely watching inflation over Q2 and should we start to see a faster than projected rebound, this is likely to reduce easing expectations. Meanwhile, if inflation doesn’t recover at such a pace, these easing expectations will be kept alive.

Technical Views

GBPUSD

The rally in GBPUSD has seen price breaking above the 1.3474 level on the last push higher. Price has currently stalled just ahead of testing the 1.3989 resistance. However, with the bull channel still developing, while price holds above 1.3747, the bias is for a continuation higher. Below 1.3747, 1.3516 and the rising channel low are the key support areas to watch.

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