The UK CPI data will be released today at 0830 GMT and the news release puts the Pound Sterling at risk across the board. Persistently low inflation has weakened the case for the BoE’s rate hike plans, which was earlier planned for a rate hike in 2015, but with falling Crude oil prices and a broader strength in the British Pound helped keep inflation below the BoE’s target of 2%.
Over the course of the months, the BoE’s MPC minutes revealed that previous members who dissented, voting in favor of a rate hike had fled the hawkish camp to make the BoE voting members unanimous in keeping interest rates as well as monetary policy unchanged.
Although the British Sterling weakened against the Greenback, it was quite resilient as the Cable managed to briefly rally back towards the 1.50 psychological level. The strength in the British Pound saw BoE Governor, Mark Carney address the issue. At one of his speeches, Carney noted that the British Pound’s appreciation would in fact help delay any possible bounce in inflation and therefore a lower exchange rate was required. The markets took this as a cue for a delayed rate hike, which now currently points to a rate hike either late 2015 or in 2016.
Just a week after Governor Carney’s comments, BoE Chief Economist, Andy Haldane noted that the BoE would not hesitate to cut interest rates if inflation continues to remain low. This rhetoric yet again saw downward pressure on the Pound, in relation to the US Dollar.
Today’s CPI data, in this context will be important, as will further releases too as the markets look for any signs of a possible increase in the monthly and annual inflation readings.
For today, the economist’s consensus points to the following:
- CPI y/y 0.1% expected, down from 0.3% previously
- Core CPI y/y 1.3% expected, down from 1.4% previously
- CPI m/m 0.3% expected, down from -0.9% previously
In his open letter to the UK Chancellor George Osborne, BoE Governor Carney noted that the falling prices in Oil was the main reason for UK’s inflation failing to reach the Central Bank’s target rate of 2%. In recent months, the decline in Oil prices have managed to stabilize and this could possibly rub into the CPI releases in the coming months showing signs of stability in the month to month inflation readings.
A better than expected CPI data could see a minor bullish run on the British Pound, but such rallies are likely to be short-lived as the larger risk of the May general elections looms overhead.
On the other hand, should inflation disappoint falling below estimates, the British Pound could see renewed weakness pour in.
In the past few weeks, the Pound also started weakening against the Euro, with the EURGBP managing to lift off from the lows of 0.702 to trade near the highs of 0.73. The Pound also weakened against other commodity risk currencies such as the Aussie, Kiwi and the Canadian Dollar, not to forget the Japanese Yen as well.
