GBP strengthens as UK inflation unexpectedly jumps

GBP stronger as higher inflation could mean tighter BoE rates 

• UK inflation moving higher again: Headline and core CPI inflation increased.
• This makes the Bank of England’s job harder: At a time when expectations of rate hikes are being revised lower, this is not the news the Bank of England needed.
• GBP is gaining: The GBP is outperforming major forex this morning along with the AUD.
• FTSE 100 is struggling: FTSE 100 has lagged the rebound on major indices and is struggling today, although US futures have also dipped.
• Elsewhere metals prices are cautious ahead of the Fed: In commodities, gold and silver have slipped slightly, whilst oil is also dragging lower.

A surprise jump in inflation boosts GBP

Inflation pressures around the world appear to have peaked, however, this does not mean that there will not be bumps along the road.

The UK inflation data this morning appears to have been just that.

An unexpected jump in both headline and core CPI inflation has caught markets by surprise:

• UK headline CPI increased by +1.1% month-on-month (MoM) in February (+0.6% exp).
• UK headline CPI year-on-year (YoY) subsequently increased to 10.4% (from 10.1% in January), with analysts expecting a drop to 9.9%
• UK core CPI increased by +1.2% MoM (+0.8% forecast)
• UK core CPI YoY increased to 6.2% (from 5.8%) with analysts forecasting a decline to 5.7%.

Increases to both core and headline inflation at a time when inflation was expected to continue to track lower, are worrying.

Food and restaurants prices are a key reason

According to the ONS (the UK statistics agency), the main contributors to the unexpected rise were restaurants and food.

Food and non-alcoholic beverages contributed +2.1% to the MoM increase, whilst restaurants and hotels contributed +2.0%.

This gives the BoE a headache for Thursday

The surprise jump in inflation comes at a terrible time for the Bank of England.

In the past couple of weeks, central banks are having to react to concerns over a banking crisis in the US which has moved into Europe.

The Federal Reserve is expected to hike by 25 basis points in today’s monetary policy decision, in what could be seen as a dovish hike. 

However, US inflation (at 6% headline CPI and 5.5% core CPI) is far lower than the UK, whilst US rates are also much higher (the Fed Funds rate is expected to go to 5.00% today).

The Bank of England is also expected to hike by 25 basis points tomorrow. This move is surely now nailed on.

However, with inflation above 10% still, it could also mean that where previously markets had thought the BoE would then be on pause, there might need to be an additional hike (or hikes) to tame the sticky inflation.

But with the emergence of the banking crisis, this means that the message that the BoE puts out tomorrow about its plans for further rates decisions will be the key takeaway.

GBP strengthens, FTSE slightly underperforms

Since the USD started to weaken again in the past two weeks, the performance of GBP has been relatively positive versus other major currencies.

This strength has taken another boost this morning.

GBP/USD

GBP has recovered well against the USD in recent weeks. 

The GBP/USD pair is now testing the 1.2268 resistance this morning. This is the barrier to a test of the bigger resistance at 1.2443.

There is an improved near-term technical outlook:

• Higher lows and higher highs are now forming within a four-month range. 
• The RSI is holding above 50, suggesting that near-term weakness is being bought into.

The two central bank meetings will be significant volatility events.

However, holding above the initial support at 1.2145/1.2203 would suggest a continued bias towards a test of the range highs at 1.2443.

The support at 1.2010 is important now.

FTSE 100 Index (UK100)

In the immediate reaction to the UK inflation data, the FTSE 100 futures dropped back.

However, as the data has been digested, it has come back more in line with a broader slip lower in equity markets this morning. 

Technically, the FTSE 100 is rallying, following two strong recovery candlesticks.

However, this is still just a near-term rebound within what still looks to be a medium-term negative outlook.

Here is what is preventing a sustainable FTSE 100 recovery:

• The RSI is still struggling below 50
• Resistance at 7643 is the first resistance of note that needs to be overcome.

Forming a higher low on this morning’s pullback would help.

Furthermore, a dovish hike from the Fed tonight could also help to boost broader indices again.

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

Data: MT5/IXOne

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