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GBP/USD's February Uptrend Holding Even After Weak CPI - Here's Why

GBP/USD's February Uptrend Holding Even After Weak CPI - Here's Why

Christopher Vecchio, CFA, Senior Strategist

Talking Points:

- Headline UK CPI sinks to an 'all-time low' of +0.3% - misleading.

- Yearly core CPI rose for second month - BoE looks prescient.

- See the February Forex Seasonality report and the implications for the majors.

A quick scan of GBP-related headlines this morning will reveal the dire warning: 'UK Inflation Slows More Than Forecast to Record-Low 0.3%' (Bloomberg). But a look beyond the headline data shows that price pressures are actually building in the UK economy, which may be contributing to seemingly quizzical response by the British Pound in the wake of the data.

The core inflation figure - stripped of the fuel component - actually shows the second consecutive month of increasing price pressures. So while the headline yearly figure dipped to a record low +0.3%, the core yearly figure increased to +1.4% in January from +1.3% in December and +1.2% in November. The data fits in neatly with the Bank of England's diagnosis last week in its Quarterly Inflation Report that, but for dampened exogenous conditions, the domestic environment is perking up and a rate hike shouldn't be dismissed over the coming months.

Sure enough, rate hike expectations are intact after today's CPI data, despite the misnomer that is the 'all-time low' headline figure. The Credit Suisse Overnight Index Swaps and forward rates, which at a point in January were suggesting a late-Q3' or early-Q4'2016 rate rike, are now pricing in 25-bps into the British Pound over the next 12-months - suggesting the market should be looking for the Bank of England to raise rates in February 2016.

See the above video for technical considerations in GBPUSD, EURGBP, GBPAUD, and GBPCAD.

Read more: Euro, USDOLLAR at Behest of Recent Trends amid US Market Holiday

--- Written by Christopher Vecchio, Currency Strategist

To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com

Follow him on Twitter at @CVecchioFX

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DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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