GBP/USD Soft as UK Inflation Continues to Surge


UK Inflation Jump

Inflation in the United Kingdom has been surging for quite a while now, running well above the central bank's 2% target and its estimates.

The latest figures that were released before European markets opened today, showed that the Consumer Price Index (CPI) jumped 6.2% year-over-year in February, a hefty increase from last month's +5.5% print.

In its latest monetary policy decision last Thursday [1], the Bank of England upgraded its outlook and now projects Inflation rising to around 8% in 2022 Q2, and perhaps even higher later this year. Before the events in Ukraine unfolded, the central bank had expected Inflation to peak at 7.25% in April.

Bank of England Policy

High inflation has forced the Bank of England to tighten its monetary policy, having delivered its third straight rate hike last Thursday. The adjustment was once again of 25 basis points, bringing rates to 0.75%.

This was largely a dovish hike though, since there was one dissenter who voted in favor of keeping rates unchanged. Furthermore, the Committee judged that some further modest tightening in monetary policy "may be appropriate" in the coming months, from February's more hawkish "is likely to be appropriate" reference.

The war in Ukraine along with Western sanctions against Russia and the surge in energy and commodity prices puts upward pressure on Inflation, but on the other hand, they can have an negative impact on economic growth.

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The Bank of England acknowledged that much, noting that "Developments since the February Report are likely to accentuate both the peak in inflation and the adverse impact on activity by intensifying the squeeze on household incomes".

Fed Hawkish Commentary

A day ahead of its UK counterpart, the UD Federal reserve had increased interest rates for the first time since 2018, but had refrained from a more aggressive 50 basis points adjustment.

During the current week, we have seen some hawkish commentary, most notable from the Chairman. Mr Powell showed readiness for a bigger move in upcoming meetings if needed, noting on Monday that "If we think it's appropriate to rise 50 basis points, we will do so" in his speech at the National Association for Business Economics (NABE) annual conference. [2],

A day later, St Louis Fed President and prominent hawk James Bullard said that the bank needs to "move aggressively to keep inflation under control", speaking on Bloomberg. [3]

GBP/USD Erases Earlier Gains

The pair demonstrates two-way action today, as it started the day in solid footing, following Tuesday's advance, but erases its gains as hawkish Fed weighs.

This creates risk for a return below the EMA100 (1.3190) that would put immediate bias to the downside and give bears the ability to set fresh weekly lows (1.3119), but it may be early for them to tackle those of the month (1.2999).

On the other hand, the British Pound closed Tuesday above the 38.2% Fibonacci of the February high/March Low drop and this gives it the chance to push for the 50% level (1.3321), but it does not inspire confidence at this stage for a larger recovery towards 1.3438.

Nikos Tzabouras

Senior Market Specialist

Nikos Tzabouras is a graduate of the Department of International & European Economic Studies at the Athens University of Economics and Business. He has a long time presence at FXCM, as he joined the company in 2011. He has served from multiple positions, but specializes in financial market analysis and commentary.

With his educational background in international relations, he emphasizes not only on Technical Analysis but also in Fundamental Analysis and Geopolitics – which have been having increasing impact on financial markets. He has longtime experience in market analysis and as a host of educational trading courses via online and in-person sessions and conferences.



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