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UK CPI Surges To Highest Level Since October 2008; Sterling Climbs But Strength Unlikely to Last

UK CPI Surges To Highest Level Since October 2008; Sterling Climbs But Strength Unlikely to Last

2011-05-17 09:09:00
Jonathan Granby,
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UK consumer prices rose at the fastest pace for more than two and a half years in April, coming in at 1.0% from the previous month and 4.5% from a year prior. The Office for National Statistics (ONS) is likely to once again be unhappy in the aftermath of the release since pre-release rumours were flying and suggested a higher than expected reading, for the second time in recent months. The ONS said that the upward jump in travel costs associated with the Easter break as well as leaps in other holiday related items (alcohol & tobacco) propelled the mammoth rise in consumer prices in April. The ONS also said that the royal wedding and unseasonably warm weather led to higher consumer spending.

While the higher than expected numbers will add to the pressure on the central bank’s governing council we believe it is unlikely that this will be enough to cause much of a shift on the MPC. Looking at the breakdown it appears that the surge can easily be put down to one-off events and we expect the Bank of England will continue to point to its medium-term forecasts of moderating inflation back below their 2% target. The recent run of soft data will aid the MPC’s argument as they a) seek to continue supporting the recovery and b) see softer growth leading to lower inflation in the near-term. Furthermore, the central bank in their minutes mention that they expect inflation to reach as high as 5% making this most recent reading certainly uncomfortable for them but not worthy of a shift in outlook. As such we only expect rhetoric for interest rate hikes to begin in H2 2011.

UK_CPI_body_gbp.png, UK CPI Surges To Highest Level Since October 2008; Sterling Climbs But Strength Unlikely to Last

Sterling jumped to a session high on the back of the firmer than forecasts UK inflation data, the leap was more modest than usual due to the fact that many had already entered long positions ahead of the release on the back of rumours giving Sterling a pre-release bid tone. With the market moving away from risk across the board we favour a retrace of these spike highs as players take the opportunity to enter fresh USD long positions (ie. Sterling short) and fade this move. Any topside moves are likely to be greeted with selling above the 50-day SMA at 1.6295 and any break back below yesterday’s lows at 1.6160 opens Friday’s 1.6145 lows and a larger downside move toward the psychologically important 1.6000. We favour Gbp/Usd lower in coming days as the USD continues its recovery.

Written by Jonathan Granby, DailyFX Research Team

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

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