Pound trims CPI related gains
Fawad Razaqzada February 13, 2018 2:14 PM
The pound staged a small rally after this morning’s publication of the latest UK inflation figures, before giving back a sizeable chunk of its gains against the dollar.
The pound staged a small rally after this morning’s publication of the latest UK inflation figures, before giving back a sizeable chunk of its gains against the dollar. It actually turned negative against the euro and yen, though it was holding its own better against commodity currencies. The ONS reported that UK CPI remained unchanged at 3% in January. This surprised some analysts who were looking for a small moderation in prices. Other measures of inflation were mixed with core CPI also surprising at 2.7%, while the RPI unexpectedly fell to 4.0% form 4.1% previously. But overall inflation rose more than expected, and the pound’s initial response was a swift rally. However sterling came off its best levels around midday as traders who bought the news, took profit.
It is worth noting that the Bank of England will probably not be surprised by the outcome of today’s inflation figures after it predicted that CPI will remain elevated and that it intends to combat this by raising interest rates earlier and faster than previously expected. But is the BoE correct in its projections? Can they be trusted? While inflation could easily rise further, one has to consider the alternative scenario too. After all, the impact of sterling’s post declines has fallen away. What’s more, crude oil prices have been falling of late, with both Brent and WTI recently turning negative on the year. If oil prices fall further then this may be reflected in lower fuel and energy prices, and hopefully lower inflation. Given the ongoing Brexit uncertainty, the BoE would favour not having to hike rates if inflation were to fall back. So, an imminent rate hike is not a done deal by any means.
Still, the BoE has definitely dropped its dovish bias and the next change in interest rates will most likely be a raise than a cut. So, there is a possibility we may see the pound drift higher in the coming months. If sterling were to shine, its best bet would be against a non-US dollar currency, as the greenback has been on a good run of form against most currencies of late.
GBP/AUD could head above 1.80
The pound was performing well against the likes of the Aussie given the recent sharp drop in commodity currencies. So, the GBP/AUD is our featured chart today. From a technical perspective, the GBP/AUD could be on the verge of resuming its upward trend after its recent pullback from the key 1.80 psychological resistance level has worked off overbought conditions. More to the point, I think last week’s bearish-looking price candle may be a false alarm for the bulls as price is currently refusing to hold below the low at 1.7610/12. If that is the case, the short-term bias would turn bullish in the event the GBP/AUD forms a base above last week’s closing price of 1.7685. Consequently, we may see the bears abandon their positions, accelerating the potential rally back towards, and this time possibly above, 1.8000. But first thing is first: we need to see the formation of a bullish daily candle here on a closing basis. Alternatively, if the GBP/AUD gives up today’s gains and goes below last week’s low then in that case we could see a deeper retracement in the coming days, before price potential forms a base.
StoneX Financial Ltd (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.
No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.