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British Pound Outlook: UK Inflation, Producer Price Data Positive for GBP

British Pound Outlook: UK Inflation, Producer Price Data Positive for GBP

Martin Essex, MSTA, Analyst

GBP price, UK inflation, news and analysis:

  • The latest UK consumer price index (CPI) data showed a smaller than expected rise in the headline inflation rate in March.
  • However, increases in several of the producer price index (PPI) numbers suggest more inflation further down the line, and that’s positive for GBP, highlighting the need for the Bank of England to tighten UK monetary policy eventually.
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UK inflation data positive for GBP

The latest batch of UK CPI data showed a smaller than expected rise in the headline inflation rate in March, emphasizing that there’s no need for the Bank of England to tighten UK monetary policy short-term even as the economy recovers from the slump caused by the coronavirus pandemic. As the table below shows, inflation rose to 0.7% year/year from 0.4% in February but was a tad weaker than the 0.8% consensus forecast of analysts polled by the news agencies.

UK CPI data.

Source: DailyFX calendar

However, rises in the PPI numbers also emphasize that the central bank will need to rase rates eventually, showing higher than expected figures for both raw material and factory gate prices.

UK PPI data.

For now, market pricing suggests that UK interest rates will not be increased until September 2022 but the Bank is likely to withdraw some of its monetary stimulus before then, and that’s positive for GBP/USD long-term and negative for EUR/GBP. Note too that EUR/GBP could be weakened by political uncertainty ahead of German federal elections in September this year.

According to Bloomberg, just as Armin Laschet, the leader of Germanys conservatives, won the nomination to lead his party into the elections, a fresh poll suggested that the bloc is quickly losing its dominance of German politics. The Forsa poll released by broadcaster RTL showed outgoing German Chancellor Angela Merkel and Laschets CDU party slump seven points to 21%, while the Greens gained five points to 28%. With a coalition of CDU and Greens seen as the most likely outcome in the fall, the Greens Annalena Baerbock may well succeed Merkel as chancellor, ending more than 15 years of center-right leadership in Germany.

EUR/GBP Price Chart, Daily Timeframe (November 18, 2020 – April 21, 2021)

Latest EUR/GBP price chart.

Source: IG (You can click on it for a larger image)

--- Written by Martin Essex, Analyst

Feel free to contact me on Twitter @MartinSEssex

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

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