An inflation headache for the BoE gives GBP another lift

UK inflation continues to run hot, GBP jumps again

• UK CPI higher than expected, again: Headline CPI only drops to 10.1%, giving the Bank of England a bigger headache
• GBP and USD performing well: The GBP has picked up on major forex on a day where the USD is outperforming on cautious sentiment
• Elsewhere equities are under pressure: After several days of gains, European indices are slipping back, with US futures also lower
• Metals and oil fall back: In commodities, silver is leading gold lower, with oil around -0.5%

An upside surprise in UK CPI

Bad news for the Bank of England: Headline UK inflation remains above 10%!

Although inflation fell year on year in March, it was significantly higher than markets had been expecting.

• Headline UK CPI dropped to 10.1% (from 10.4% in February), the consensus was looking for 9.8%
• Core CPI remains at 6.2%, with the consensus expecting a drop to 6.0%.

This is the second month in a row where inflation has come in much higher than expected.

A headache for the Bank of England

Inflation was supposed to drop back decisively in February, however, it caught everyone on the hop with a surprise jump on both core and headline CPI.

Looking at the monthly data there will be some considerable concern.

Here is the monthly headline UK CPI data over the past 12 months:

• MoM Headline UK CPI increased by +0.8% in March
• Also, MoM Core UK CPI increased by +0.9% in March

If this monthly data was replicated across the year, it would leave headline CPI on a run rate of 9.6% and core CPI at 10.8%.

This is certainly not the data the Bank of England would want to see. Inflation is not coming down in the way they would have hoped.

In yesterday’s UK employment data for February, wage growth also remained the same (around 5.9% total pay) meaning that real wages remained steady.

However, with inflation around 10%, whilst wage growth is 6%, real wages remain decisively negative.

This weighs on consumer spending power and confidence too.

This adds to the headache that the Bank of England has over monetary policy tightening, which with inflation above 10% remains a necessary policy response.

A rate hike to 4.50% in May is now a foregone conclusion.

GBP rallies, FTSE 100 falters

This high inflation means that the Bank of England will need to be tighter on monetary policy for longer.

This is boosting GBP again today (after yesterday’s rally on the back of the higher-than-expected wage growth).

However, it is also proving to be negative for UK equities, as the FTSE 100 has dropped away.

GBP/USD

We saw GBP/USD higher yesterday after the UK wage data. This move is continuing this morning after the UK inflation numbers.

This is helping to bolster the support at 1.2345, increasing its importance to the near to medium-term outlook.

• Momentum remains positive on the medium-term outlook (rising back towards 60 on the daily RSI).
• The intraday charts also show a breakout above the initial resistance at 1.2450.

A close above 1.2445 would increase the likelihood of a test of 1.2545 which is the key resistance now.

Initial support is at 1.2400.

FTSE 100 index (UK100)

This early pullback on FTSE 100 looks to be an important moment.

The uptrend of the past four weeks is being tested.

The daily candles have been becoming less bullish in recent days and now if the pullback this morning continues into the close there could be a reversal.

• The intraday charts (4-hour and 1-hour) show important initial support at 7860/7870.
• If this is broken it would signal a topping out of the move higher.
• The implied target would be an initial 50 ticks lower towards 7810.

However, this could then encourage profit-taking for a deeper correction in due course.

For now, the support is holding, but this is something we will be watching today.

Resistance is at 7915/7920.

Support and resistance levels for Forex, Commodities, and Futures/Indices 

Data: MT5/IXOne

This material is for general information purposes only and is not intended as (and should not be considered to be) financial, investment or other advice on which reliance should be placed. INFINOX is not authorised to provide investment advice. No opinion given in the material constitutes a recommendation by INFINOX or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.

All trading carries risk.