The UK's High Inflation Rate
The UK's headline inflation printed at 10.1% on 19 April, which was higher than the 9.8% forecast. Wage inflation, released the day before, was also higher than anticipated at 5.9% (vs 5.1%). This puts the BoE in a difficult position considering that it targets 2% inflation. It is lagging the other major economies in its attempts to control price pressures.
It is anticipated that the central bank will hike its official bank rate by 25bps to 4.5% on Thursday. The rate of change (ROC) for both wage growth y/y and the inflation rate y/y are on the acceleration side of zero (red arrows). The BoE's monetary policy will need to affect this and push the ROCs to the deceleration side of zero (green arrows) in its pursuit to reach target. Therefore, the market expects further hikes with the official bank rate expected to reach 4.75% in September.
The 2-Year Note Spread
The top chart shows the spread between the British 2-year gilt and US 2-year note. The 2-year fixed income instruments serve as good proxies for relative monetary policy. This is because shorter-term borrowing costs respond quickly to changes in monetary policy.
The spread has charted a higher trough followed by a higher peak as the spread increases in favour of the gilt. This suggests relative hawkishness of the BoE over the Fed.
This bottom chart shows the GBPUSD forex pair, which is in uptrend (black trendline). I.e., the relative hawkishness of the BoE is filtering through and reflecting in GBPUSD appreciation.
GBPUSD Weekly Analysis
- The bottom indicator shows Bollinger BandWidth.
1.1. The red verticals show previous times that the Bollinger bands were squeezing.
1.2. Bollinger band theory suggests that volatility is cyclical – a squeeze will evolve into an expansion of volatility.
1.3. The green vertical shows the current squeeze which has just resolved.
- The red verticals correspond with GBPUSD being in its weak channel between the lower blue and red bands (top chart) and RSI on the bearish side of 50 (red rectangles).
2.1. As a result, GBPUSD declined as volatility increased, following these previous squeezes.
- However, the green vertical has a bullish bias to it.
3.1. GBPUSD is positioned in its strong channel between the upper blue and red bands.
3.2. The RSI is on the bullish side of 50 (green rectangle).
3.3. The longer these positions are maintained the greater the likelihood of further GBPUSD appreciation.
- UK inflation is high.
- The BoE will need to hike rates to combat high prices.
- The BoE is more hawkish than the Fed on a relative basis, as per the spread between the respective 2-year notes.
- This is supportive of GBPUSD.
- GBPUSD is currently positioned in a bullish channel with positive momentum, as per its RSI.
Senior Market Specialist
Russell Shor joined FXCM in October 2017 as a Senior Market Specialist. He is a certified FMVA® and has an Honours Degree in Economics from the University of South Africa. Russell is a full member of the Society of Technical Analysts in the United Kingdom. With over 20 years of financial markets experience, his analysis is of a high standard and quality.