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DailyFX European Market Wrap: Sterling Up for Now, Will CPI on Tuesday Extend the Rally?

DailyFX European Market Wrap: Sterling Up for Now, Will CPI on Tuesday Extend the Rally?

Katie Pilbeam, Contributor

Daily FX Market Analyst Oliver Morrison joined us in studio talk about the British Pound strength at the end of the week. He noted that Sterling rallied after Bank of England policymaker Kristin Forbes voted for an interest-rate increase, a dissent that caught some in the market by surprise. Forbes has commented in recent months that she believes the BOE should have a low tolerance for an inflation overshoot, which her dissent reflects.

Going into next week, this past Thursday’s BOE interest rate decision could be a signal that the bank is growing increasingly ready to normalize policy over the longer-term. Indeed, the BOE had commented that it saw the potential to withdraw its stimulus measures over a three-year horizon. Other MPC members apparently said it wouldn’t take much more strength in inflation or growth for them to also shift their view.

A key phrase from the BOE policy statement, as Oliver pointed out: "With inflation rising sharply, and only mixed evidence on slowing activity domestically, some members noted that would take relatively little further upside news on the prospects for activity or inflation for them to consider that a more immediate reduction in policy support might be warranted."

For now, the Pound has yet to break important resistance levels versus the Euro and the US Dollar for the rally to look sustainable. If not, the rally looks like mere profit taking on stretched positions. There could also be more Sterling volatility due in the coming days with next week’s UK CPI data (Tuesday) and retail sales data (Friday). If inflation continues to accelerate if could continue that shift in view among the MPC – especially if retail sales on Friday are good.

Though we are seeing a lot of signs that the inflation caused by the weaker Pound is beginning to crimp consumer spending, which could impact on growth. FTSE – has hit new highs – can it sustain them? Depends on exchange rates and oil prices – they’ve calmed down a bit on the weaker dollar, after dropping below $50/brl a barrel on production cut fears. At last looks like oil is heading for a modest weekly rise as we head into the close.

--- Written by Katie Pilbeam, DailyFX

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

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