GBP/USD edges higher after CPI data shows UK inflation fails to soften, eyes on BOE
Subscribe to Weekly HighlightsThe major market events for the week ahead right in your inbox. Subscribe
GBP/USD has seen another boost this morning as the consumer inflation data has confirmed that price pressures remain highly elevated in the UK. Headline inflation, which includes volatile prices like energy and food, did come down slightly from a year ago (10.5% vs 10.7%) but the monthly growth remains unchanged at 0.4%, which highlights the ongoing inflation dilemma in the region.
Core inflation actually rose on a monthly basis, with the year-on-year figure unchanged at 6.3% but above expectations of a small drop. This puts further pressure on the Bank of England to act more forcefully to bring down inflation and ease the cost of living crisis on UK households.
Markets are now gearing up towards a 50bps hike on February 2nd which would take the bank rate to 4%, the highest level since the 2008 financial crisis. The market-implied yield currently stands at 3.86%.
Given how the recent data has shown resilience in the UK economy it seems like it should be pretty much a done deal for Governor Bailey and the Monetary Policy Committee (MPC) to hike rates another 50bps but given their reluctance throughout the last year markets are not fully convinced they will go for 50bps over 25bps, hence the implied yield hovering below 4%.
The focus over the next two weeks heading towards the MPC rate decision will be any comments from voting members that give further insight into what can be expected on February 2nd. We also have some more data coming out before then, including retail sales this Friday and PPI next Wednesday but the brunt of the data has already been priced in.
On the charts, GBP/USD has managed to build momentum higher over the last 2 weeks and is now sitting comfortably above its key moving averages, which gives buyers a slight advantage. The higher core CPI reading has boosted hopes of a more hawkish Bank of England which has been keeping GBP pushing higher in recent months, especially now that the Fed has started slowing down its hiking schedule. The next challenge for buyers is the December high at 1.2446 which was reached just before the December BOE meeting which showed that Gov Bailey is still playing hard to get and focusing his efforts on not over-tightening and damaging the economy in the process.
Past this area, we face the highs from May at 1.2666 but I wouldn’t be surprised if we see some sideways trade around 1.25 on the move higher, similar to what happened back in June. The path of least resistance seems to remain to the upside so further upside momentum is likely, but similar to what we’ve seen this month so far, we may see the pair come off from its daily highs as it moves higher, showing some resistance from sellers to let go. I think that as long as we see GBP/USD holds above its 200-day SMA (1.1982) then we’ll see modest gains heading into the BOE meeting in two weeks.