Trade idea of the day: Inflation data to send GBP/USD to $1.43?

After pound traders were left twiddling their thumbs last week, the week promises to be vastly different, already we have news of an agreement between the EU and the UK over a transition deal, which has boosted the pound almost 1%. Looking ahead, investors will digest high impacting data releases and the Bank of England (BoE) monetary policy decision.

What: 

After pound traders were left twiddling their thumbs last week, the week promises to be vastly different, already we have news of an agreement between the EU and the UK over a transition deal, which has boosted the pound almost 1%. 

Looking ahead, investors will digest high impacting data releases and the Bank of England (BoE) monetary policy decision.

The first scheduled event will be inflation data due for release at 09:30 GMT on Tuesday. Inflation has been elevated, around 3% since September last year, and has been above the BoE’s 2% target since shortly after the Brexit referendum back in June 2016, when the fall in the price of sterling sent inflation shooing higher. 

This weak pound induced inflation is expected to start working its way out of the system this year. CPI in March is forecast to see a decline from 3% in February to 2.8%. Meanwhile core inflation, which strips out more volatile items such as food and fuel, is forecast to drop from 27% to 2.5%. 

These are the biggest forecast declines in inflation for some time and whilst they will be too small for the consumer to feel a difference, they could offer some wiggle room to the BoE.

Should inflation fall as expected, the BoE will find itself with some extra breathing room as they meet for the two-day Monetary Policy Committee (MPC) meeting. 

This may encourage some of the more dovish members of the MPC to take their foot off the accelerator as far as rate hikes are concerned. 

Whilst the BoE have been looking at a hike later in the year for some time, the possibility of a hike in May has also been increasing. Signs that inflation is falling back towards the 2% target is like to reduce the potential for the hike in May which could see GBP/USD come under pressure.

How: 

In this scenario the divergence between the Fed, which is almost certain to hike in March and possibly another 3 time through the year and the BoE will be all the more notable, potentially pulling GBP/USD back below $1.40 from its current level of $1.4075.

On the other hand, a stronger than forecast inflation read could see GBP/USD take aim at $1.43, boosted by today’s transition deal, high inflation and increased potential of a rate hike in May.

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