Solid Gains for GBP/USD as UK Inflation Returns to Uptrend

February 13, 2018 - Written by Toni Johnson

STORY LINK Solid Gains for GBP/USD as UK Inflation Returns to Uptrend

The Pound Sterling to US Dollar exchange rate is registering minor gains today, although it has fallen from its intraday high, after positive UK inflation data was released this morning.

The GBP/USD exchange rate is up 0.2% to 1.3876 after consumer price index figures provided further justification for the Bank of England (BoE) raising interest rates in the near-term and potentially continuing to do so again later in the year.

However, not everyone is convinced, so the Pound has ceded some of its early morning bullishness.

GBP Gains Soften as Markets Rethink Rate Hike Optimism after Knee-Jerk Reaction to Inflation Data

This morning’s January consumer price index figures for the UK all beat expectations, with year-on-year price growth overall holding steady at 3%, instead of dipping to meet analyst’s expectations of 2.9% growth.

Core consumer price growth, a more reliable and stable indicator of underlying inflationary pressures, rebounded from 2.5% to 2.7%, skipping the 2.6% figure economists had pencilled in.

This was sufficient to see many analysts stating that the odds of an interest rate hike from the Bank of England this year had risen, as policymakers would have to raise borrowing costs in order to combat the squeeze in real wage growth that is likely to dampen consumption as 2018 progresses.

However, while the GBP/USD exchange rate shot higher, it has since moderated gains after other analysts pointed out that the BoE had expected price growth would rebound in the short term and that, therefore, it was not guaranteed that today’s figures would necessarily change the monetary policy outlook.

Cavendish Asset Management Fund Manager Paul Mumford warned;

‘January’s figures exclude the full effect of the recent market shake out, a subsequent decline in oil prices and weaker sterling against the dollar. It could easily be that inflation drops back in February, something that would take the pressure off of rates.’

USD Uncertain as Fed Mester Reassures over Market Selloff but Suggests Three 2018 Rate Hikes, Not Four

GBP/USD exchange rate gains have also been pushed back by a stronger-than-expected uptick in the NFIB small business optimism index for January, which rose from 104.9 past forecasts of 105.7 to 106.9.

A speech from Federal Reserve official Loretta Mester has proven somewhat mixed as far as investors are concerned.

On the one hand, Mester was the latest in a long line of Fed officials to reassure markets that the recent stock market volatility – which wiped around -$2 trillion from the global equity markets – would not have a negative impact upon the monetary policy outlook.

The global volatility continues today and is one of the reasons the US Dollar is not on particularly-strong form.

USD is losing market share against the Japanese Yen as investors retreat from global market turbulence into what is considered to be one of the safest currencies on the market, if not the safest.

Mester also stated she believed that, based upon current conditions, the Federal Reserve should aim to tighten monetary policy at a similar pace to that seen in 2017.

This would mean only three rate hikes; this somewhat dampens market hopes that the Federal Open Market Committee (FOMC) is becoming more hawkish in its outlook and would opt for four rounds of tightening during 2018.

Can GBP Record Gains versus USD on Predicted Slowdown in US Inflation Tomorrow?>/h3>

The economic data calendar is tomorrow devoid of any UK ecostats, leaving key US data and the ever-present threat of Brexit surprises in charge of GBP/USD exchange rate movement tomorrow.

US inflation data for January is expected to show a slowdown in consumer price growth at the start of the year, with overall prices expected to rise 1.9% year-on-year versus the 2.1% YoY increase seen in December.

Core consumer price growth is expected to have slowed from 1.8% to 1.7%.

Additionally, advance retail sales data is predicted to show a slowdown in sales growth from 0.4% to 0.2% month-on-month.

This might knock confidence that the Federal Reserve will opt to raise interest rates in March, although some analysts are sure to point out that January tends to be a quiet period for retailers anyway, as everyone has spent their money in December over the Christmas period.

Of course, stock and bond market investors will actually be hoping for an inflationary slowdown, as this will take the pressure off the equity markets.

A return to global calm could see investors returning to the US Dollar from other safe-haven currencies so, ironically, USD may win regardless of what inflation does tomorrow.

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