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GBPUSD Firms as UK Inflation Tops Expectations

GBPUSD Firms as UK Inflation Tops Expectations

Martin Essex, MSTA, Analyst

GBPUSD talking points:

- UK inflation stayed at 3.0% in January rather than easing to 2.9% as analysts had forecast.

- That makes a UK rate rise in May even more likely and the Pound was firmer as a result.

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UK inflation data top expectations

UK inflation remained at 3.0% in January, unchanged from the previous month and defying expectations of a fall to 2.9%. That makes an increase in UK interest rates in May more likely and the Pound firmed modestly in response.

Speculation that UK Bank Rate could be raised in May intensified last week following more hawkish than expected comments by Bank of England Governor Mark Carney after the bank left interest rates unchanged. Other member of the bank’s rate-setting monetary policy committee have echoed his comments since then, putting a quarter-point rate rise in May firmly back on the agenda.

While the positive impact on inflation of the Pound’s steep fall in June 2016 when the British voted in a referendum to leave the EU has now largely dissipated, the strength of the crude oil price between June 2017 and the end of January this year will have lifted prices.

That has underpinned the Pound despite the potentially negative impact of Brexit on the currency.

GBPUSD Price Chart, Five-Minute Timeframe (February 13, 2018)

GBPUSD Firms as UK Inflation Tops Expectations

Chart by IG

For the UK central bank, the key figure is the core inflation rate rather than the headline rate, and that increased to 2.7% in January, above both the predicted 2.6% and the previous 2.5%. That too makes a May rate increase more likely, even though UK producer-price inflation fell in January to its lowest in more than a year.

The markets are now pricing as much as a 70% chance of a quarter-point rate rise in May and a probability of around 50% of a further quarter-point hike by the end of this year.

--- Written by Martin Essex, Analyst and Editor

Feel free to contact me via the comments section below, via email at martin.essex@ig.com or on Twitter @MartinSEssex

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