UK CPI Surges, All Eyes On Tomorrow's Inflation Report

In a surprise release, the Office for National Statistics revealed inflation figures that jumped over expectations for the month.  Good for the British pound, the recent gain will place more emphasis on tomorrow’s inflationary report that will reveal a bit more in the way of future monetary policy.

According to the monthly inflationary index, consumer prices in October jumped to a 2.7% annualized gain. The advance in prices rose over more mild expectations of a 2.3% uptick,slightly above the Bank of England’s preferred benchmark.  Currently, central bankers are targeting inflation to remain within a 2-3% band. 

Now, although today’s release doesn’t change anything as far as monetary policy is concerned, it may spark a shift in future interest rate considerations.  Central bankers were expected to keep rates or other monetary stimulus on hold in the near future.  However, the surge in consumer prices is likely to support further jawboning from more hawkish policymakers on the committee – like Chief Economist Spencer Dale or external members Martin Wealeand Ben Broadbent.   This could pose a problem in the short term if it’s determined that further stimulus is actually needed - a consideration well noting now, especially as the UK economy continues to show signs of contraction.

Stronger protests from the hawkish corner would make near term central bank decisions a lot closer than anticipated by market experts, injecting some periodical volatility in the sterling.

As a result, expect tomorrow’s report to reflect a consideration by policymakers that inflationary pressures are in fact emerging in the UK and will likely continue into the beginning of next year.  Traders will be taking particular note of the sentiment reflected in the statement especially with the upcoming MPC vote on December 6th.

The fundamental aspect of sterling coincides with the short term technical outlook that shows the major currency finding support just above 1.5843 50% fib support from 1.5392-1.6308. The level works in conjunction with oversold signals in Stochastics and a slightly bullish MACD convergence.  A bounce here would place attention on initial resistance at the psychological level of 1.5950, with a break higher opening scope for an advance to 1.6100.

gbpusd chartSource:  FXTrek Intellicharts
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