Pound jumps on inflation overshoot

The pound got another shot in the arm after the latest measure of consumer inflation was released this morning, which revealed a surprisingly strong reading for the month of August.

According to the ONS, the headline Consumer Price Index (CPI) jumped to 2.7% year-on-year in August compared to 2.5% previously, while core CPI rose to 2.1% versus 1.9% last. The data easily beat expectations of 2.4 and 1.8 percent, respectively.

The inflation data helped to boost speculation over further rate hikes from the Bank of England, causing sterling to surge higher which caused the FTSE to slip. The GBP/USD briefly climbed above 1.32 for first time since July, before easing back a little. The GBP/JPY also surged while the EUR/GBP extended its declines.

Inflation was driven in part by the highest rise in recreation and culture prices since 2010, according to the ONS. Transport services and clothing were also responsible for the uptick in inflation.

Meanwhile other measures of inflation were also stronger. The Retail Price Index (RPI) climbed to 3.5% from 3.2% previously, easily topping forecasts. PPI Input & Output prices rose 0.5 and 0.2 percent respectively with petroleum being the largest upward contributor.

Prior to today’s CPI report, the pound had already been on the rise. Out of the past five weeks, the GBP/USD, GBP/JPY and GBP/EUR had risen on four occasions.

In large part, sterling’s recent gains have been a reflection of the growing optimism over a soft Brexit deal. But we’ve also seen consistent improvement in UK data, raising the prospects of a few rate increases from the Bank of England once there’s clarity about the sort of relationship the UK and EU will have in the future.

If optimism over a soft Brexit is maintained, the pound could rise further over time as speculation grows over the prospects of tighter monetary conditions in the UK.

That being said, sterling remains pretty much headline-driven in the short term and any potential setbacks in Brexit developments could easily derail the rally as negotiations enter a critical stage.

But one thing for sure is that — thanks to the above fundamental drivers— the path of least resistance remains to the upside from a technical stand point for the major pound crosses. As such any dips back to prior resistance levels should get supported until something fundamentally or technically changes.