Sterling fails to sustain gains after sharp inflation rise

One would expect a 0.5% surge in a headline inflation figure which was already double the BoE’s official target to give sterling a genuine and sustained boost. This has not been the case today, sterling has erased the pretty decent gains it made in the build up to the data release, to trade flat on the day presently.


Why? There seems to be a feeling that UK inflation can go as high as it likes (within reason!), the UK economy is just too flimsy to take a rise in borrowing costs. The subsequent BoE letter to Chancellor George Osborne pointed to the economic risks of bringing UK inflation back down to target quickly. There was definitely a sense that the BoE will wait, or given little option to wait until the very end of the year at the earliest.

Sterling is benefitting from the current euro-weakness at present but if and when this Greek issue is swept under the carpet for another year, it seems likely that the awful sentiment towards the UK economy could weigh on sterling moving forward.

In the very short-term, sterling can look to tomorrow’s UK unemployment data, MPC minutes, and Thursday’s UK retail sale data. I’m tempted to think not even a hawkish minutes will convince the market it is genuinely considering raising rates before the end of the year. On a more positive note, UK retail sales are forecast to improve significantly. However, a strong figure will only be a starting point I’m afraid, market participants will require a lot more.

Richard Driver
Analyst – Caxton FX


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UK inflation provides an upside surprise

Data this morning has shown that the UK headline inflation figure has risen to 4.5%, but expectations of a higher figure had already been priced in over the morning. With the previous figure showing that prices had increased by 4.0% from the same point last year this latest monthly rise is in line with strong global price pressures. As the highest UK inflationary figure rise since 2008, the increase is well ahead of the forecasted 4.2% rise.

This indicates that last month’s ease in price pressures was due to temporary factors, with fuel prices and the VAT rise taking their toll on UK inflation. The market had a BoE rate rise priced in for December 2011, and I wouldn’t be surprised if today’s data brings some of those bets forward.

King recently indicated that UK headline inflation could hit 5.0% in the coming months – if he is right then it could well force the MPC to succumb to pressure and raise rates.

Sterling spiked in the build-up to the data release, but how far it will push on from here in light of the upside surprise remains to be seen. UK inflation is expected to climb quite aggressively, and despite today’s data there is still a need for much stronger UK growth before the BoE tightens policy. King’s open letter to George Osborne later today and tomorrow’s MPC minutes should clarify the level of genuine hawkishness within the BoE - a rate rise before December could be disastrous.