UK CPI Preview - Could the BoE have a huge problem?
|The UK inflation data should be a concern for markets at the moment, as it puts the BoE in a difficult position, irrespective of their intentions to tighten policy in the 'coming months'. CPI has hard to forecast at the present time with the Fed and ECB at pains to explain sluggish follow through from growth, but in the MPC also have to factor in the exchange rate effect, and with the backdrop of slowing growth as business investment slows amid Brexit uncertainty. Therein lies the crux of the issue, and whether one believes the talks will progress, it is hard to ignore that some damage has been done to the economy, and that higher inflation can reflect anything more than a further squeeze on household income. Job growth has been stable here, but the impact of relocation from London will have an impact on the UK's business hub and the surrounding structure.
Comments from some of the UK's leading organisations including the BCC (British Chambers of Commerce) have revealed concerns over the change in stance at the BoC, and as we heard from CityUK today, any transitional deal be too late to stave off negative impacts on London - as we alluded to above; relocation. However, for the purposes of this morning's review on CPI, we expect a mixed response to the data. A move above 3.0% will require Gov Carney to write a letter of explanation to the chancellor, but clearly Mr Hammond is fully aware of the factors behind this, and so should the market in deciding whether this is a reason to push GBP higher. We have long argued that the rates outlook will go only so far in pushing the Pound higher, as the longer term consequences can only point to yet more hardship for the UK consumer (and mortgage holders), and this should at the very least serve to cap gains.
We still see little scope for a Cable move beyond the recent highs in the mid 1.3600's, and traders are ready to fade moves anywhere near 1.3500, but more likely 1.3400. EUR/GBP is not as clear cut with the European landscape shaken by politics again, but is seems we have a base here in and around 0.8800, and this is more likely tested from the EU perspective at the present time.
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