UK Inflation and BoE – Fundamental risks to GBP this week

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The week ahead will be a busy one for the British Pound, with two fundamental risks that could determine the Pound Sterling’s rather choppy trading. The UK’s monthly consumer price inflation data will be released on Tuesday and will be followed later in the week with the Bank of England’s monetary policy meeting for April, which will be out on Thursday.

For consumer inflation, expectations are for a modest increase in the month of March. Due on April 12th, the UK’s annual CPI is expected to rise to 0.40% in March, while the core CPI, which strips the volatile components such as energy and good is expected the rise to a modest 1.40%, up from 1.30% in February. Although the expectations are in favor of an increase in consumer inflation, weak economic growth as seen by the PMI numbers during the first three months of the year alongside muted inflation is likely to keep the Bank of England on the sidelines for a long time to come. The UK’s benchmark interest rates stand at 0.50%, and almost all members of the MPC’s voting committee have stayed unanimous in keeping rates unchanged.

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By the time the BoE met in March, UK’s consumer price index had increased 1.0% on an annualized basis. Back then the Bank of England judged that the increase in inflation rate came from mostly the non-core group which includes energy and food on account of the base effect. Downward pressure on CPI from cheaper gasoline and food could keep inflation in the UK soft for the most of this year, but in the longer run inflation in the UK is expected to slowly pick up pace.

So far, the BoE’s forecast on consumer inflation is expected to show a modest increase throughout the year. While the Brexit risks have sent the pound sterling weaker, a continued depreciation in the exchange rate could, however, help turn the tide for UK’s consumer price index forecast which could open the risk for a potential increase in the inflation forecasts from the BoE and thus interest rates as well.

At this week’s meeting, BoE’s monetary policy committee members will be most likely voting to keep policy unchanged, and it is likely that this will be the decision that will stay over the course of the next few quarters. With UK’s first quarter economic growth showing signs of slowing both due to domestic factors and increasing headwinds from the global economic slowdown, it could be very well that the BoE might prefer to keep the monetary policy accommodative. However, it is unlikely to expect to see any prospects for a rate cut for the time being. Earlier MPC meetings showed that members did argue on the issue but for the most part, policymakers have come out strongly noting that there was a probability that rates would be hiked rather than being cut even further from the current 0.50%.

With the Brexit referendum due on June 23rd, the BoE could be seen staying on the sidelines. However, once the event is done with it could be likely that the Bank of England could start coming out more hawkish in the statements in favor of rate hikes, should inflation start to show signs of turning the corner. The price of Crude Oil has been volatile, but it has definitely convinced many that a bottom was in place. W sustained a move to the upside in Oil prices could perhaps help revive hopes for inflation starting to move higher.

GBPUSD was seen trading strongly today, rising over 1.0%. The cable is currently trading at $1.427.


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