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UK Inflation Slowed, GBP Slides, BOE Might Be Right

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Earlier this morning, everyone was waiting for the UK inflation data, which was supposed to come in higher in June. However, the numbers came in with a surprise slowing down .

CPI, Core CPI and the RPI showed a faster slowing down, while PPI declined less than expected. Moreover, the House Price Index slowed down further, but slightly less than expected.

CPI First Decline in 6 Months

The YoY CPI was supposed to remain stable at 2.9%, which is the highest level since June of2013. However, it slowed down back to 2.6%, which is the lowest level in two months.

Yet, this doesn’t mean that the UK inflation is turning around from here. However, the Bank of England might be in a good position to wait for some time, before deciding on trimming the ongoing QE.

Core CPI Remains Above BOE Target

The Core CPI YoY came in with a surprise, declining all the way back to 2.4% down from 2.6%, despite the fact that the estimates were to remain stable.

On MoM, Core CPI showed no changed, contrary to the estimated +0.2%, after rising by 0.3% in May. Yet, the Core CPI and the CPI (YoY) remains well above the Bank of England target .

Bank of England Dilemma

There are a lot of reports and analyst saying that the Bank of England made a mistake when they increased the level of asset purchases, few months after the Brexit.

This might be true. However, there was nothing else the bank could have done. Rates were already at record low, they were forced to cut them by another 25bps, while growth is still weak.

Yet, inflation was also far away from the BOE target. Things have changed which now put the Bank of England in a corner that no one would be interested to be in.

Inflation is higher than the BOE target, while growth is at the lowest level since 2013. Despite the fact that stagflation is not there due to the notable decline in Unemployment, but this might be the end of the downside cycle in unemployment before starting to implement Brexit on the ground.

Therefore, how the Bank of England will handle this, should they raise the rates and taper the QE to stop inflation from rising, or to keep everything on hold to support growth?

Nobody knows, but the Bank of England would prefer to stop inflation from overshooting, even if the economy slides back in to a recession.

GBP Pump And Dump

GBPUSD had an interesting day since the start of the Asian session. The news that came out from the US regarding the opposition of two republican leaders of Trump’s Healthcare bill, pushed the US Dollar sharply higher across the board, sending GBPUSD above 1.3120’s.

However, the pair failed to stabilize above 1.31 following the unexpected slowing down in inflation, which gives the Bank of England some relief, sending the pair all the way back to 1.30 handle.

However, the pair was able to stabilize above 1.30 psychological support, which pushed the pair back to 1.3050 once again.

In the meantime, the current decline amid the expectations of a sooner tightening by the BOE would keep GBP bids higher, even within the Brexit negotiations.

Any downside retracement is likely to be limited either around 1.30 which held earlier today and/or the next possible support which stands at 1.2870’s.

On the upside view, traders need to be aware that GBPUSD is now trading above 1.2820’s, which is the solid level that held for some time right before the flash crash. The rebound above this level would ease the bearish outlook.

With USD weakness continues, GBP might find its way toward 1.33.

 

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