GBP Gains on Inflation Data

• Inflation data signals hope for the UK economy


• BoE still likely to perform further easing

On Tuesday, the Pound sterling gained as it climbed from 3 year lows against the euro and rose further away from a 5 week channel it formed against the dollar, the GBP mostly gained its strength from the higher than expected inflation data.

After inflation rose to 0.6% in July compared with last year, Michael Hewson, of CMC Markets, says the question on everyone’s lips now “is whether these price increases get absorbed by manufacturers or get passed down into the supply chain in the coming months,” he also stated that, "Ultimately while a weaker pound may well hurt exporters, any rises in inflation will only eat into consumers’ disposable income, particularly if average earnings fail keep pace with the rise in prices. We’ll get further colour on that in tomorrow’s wages data. A lot is likely to depend on how the economy performs in the next few months. It also calls into question the recent measures by the Bank of England to throw the kitchen sink at the economy in an attempt to avert a potential slowdown in the coming months, as this rise in inflationary pressures predates this month’s additional easing measures”.

Consumer price rises gained pace, as it was reported 0.6% higher in July compared with the previous year, this is its largest leap since the end of 2014. A poll conducted by reuters reveal that analysts had expected a 0.5% rise in consumer prices. An increase was also seen in Factory gates prices as they rose at their fastest pace in more than 2 years with the GBP’s slump after the outcome of the Brexit vote aiding import prices as they edged higher. Producer prices were also reportedly 0.3% higher in July, higher than the value at the same month last year and better than the median forecast in a poll conducted by Reuters.

The Bank of England cut interest rates 2 weeks ago to record lows and revealed a bond buying programme with analysts anticipating a faltering in economic activity, the perceived aftermath of the UK’s referendum, an event that raised the chances of further policy easing from the Central Bank in the coming months.

Ipek Ozkardeskaya, senior market analyst at London Capital, stated that, "The stronger inflation data gave the heavily short-sterling market the opportunity to attempt an upside correction. The $1.30 level has acted as a solid resistance. Clearing the $1.30 could pave the way for a further correction while a failure to successfully clear that barrier should encourage the sellers on the rally and keep the bias on the downside."

Analysts currently believe that higher inflation readings in the next few months will do nothing to alter the BoE’s initial monetary policy outlook, with the idea that a lower currency is likely to raise the prices of imported goods, but the BoE also stated that they will consider all of this while making their next policy decision.

"Today's numbers are unlikely to unseat the BoE's resolve in regards to using monetary policy to try to mitigate some of the negative economic impact from the Brexit shock," said Andy Scott, economist at HiFX.