The consensus among economists is that inflation in the UK accelerated in April. But, this is not expected to shift the outlook for the BOE, because the increase is baked into the model. But, it does provide a platform to keep the pound relatively strong. That is, unless there is a surprise to the downside, which could pull cable lower.
British policymakers have been having a series of better than expected data, such as stronger economic growth. While this might be cheered in 10 Downing Street, it does make the situation a little more complicated for the BOE. That’s because inflation is still roaring ahead faster than the economy is growing. But, for forex traders, at least in the short term, it’s supporting the pound.
Flying High Among the Pairs
The pound has been relatively strong among the major currencies, as the BOE is being much more cautious about lowering interest rates than its peers. And that caution was increased after the last GDP figures. A growing economy means faster monetary circulation, which implies that inflationary pressures remain.
On the other hand, the growth rate was far from ideal. That means the BOE likely wants to lower rates to provide support for the economy. But it can’t under the current circumstances due to the high inflation. In terms of how this affects policy, it means that the central bank is easing as much as inflation allows, in a manner of speaking. So, if inflation is lower than anticipated, then it opens room to ease that the BOE will be eager to occupy.
The Market Reaction
Inflation affects the market primarily by changing expectations around what the central bank will do. In this case, the BOE expects inflation to rise, so unless there is a significant overshoot in prices, it will fit within the model of the current easing cycle. That’s another reason to expect a stronger market reaction if there is a meaningful miss.
The BOE actually expects inflation to keep rising until September, and top out at 3.7%. Then it is projected to start coming back down to target. However, that increase is seen within the more volatile elements such as food and energy, with the core rate remaining fairly stable until the second quarter.
What the Data Says
UK April inflation in April is expected to jump up to 3.3% from 2.6% prior, with the bulk of that attributed to higher energy prices. April is when utilities companies typically adjust pricing for the year. Even though the price cap for energy is lower from the prior month, the price compared to the prior year is projected to be around 6% higher. The core rate is expected to tick up modestly to 3.5% from 3.4% prior.
This high inflation and the corresponding expectation that the BOE will be slow to cut rates has helped keep the pound strong, lately. This is likely why cable has been largely moving sideways despite renewed strength from the dollar over the last few weeks.
