- Economists expect inflation to have shot up to 2.9% YoY in August.
- Higher price rises may tilt the divided BOE toward rate hikes.
- GBP/USD has been trading under resistance, which could break now.
When will the Bank of England raise interest rates? That is a critical question for the pound, and has become even more pressing lately – and a surge in inflation could tip the scales in favor of tightening and a stronger sterling.
BOE Governor Andrew Bailey recently said that the Monetary Policy Committee (MPC) was split 4:4 on the question of conditions were met for hiking borrowing costs. The UK economy benefited from the return to normal in the spring and perhaps from "Freedom Day" – the loosening of most restrictions back in July.
On the other hand, jobless claims dropped by only 58,600 in August, less than expected. The more recent data suggests growth is slowing, but the last word belongs to inflation, which the BOE is mandated to keep in check.
Economists expect the headline Consumer Price Index (CPI) to leap to 2.9% YoY in August from 2% in July – a dramatic change. The bank's target is 2% CPI and any move outside the 1-3% band requires a formal explanation from the governor.
Apart from revealing that the MPC is split, Bailey also seemed to hedge his bets for every outcome, saying in that September 8 testimony that:"There are risks on both sides to inflation returning to target over the medium term." August's data will shed some light on where prices are going.
CPI and GBP/USD reaction
It would only take a small upside surprise to price in a rate hike as soon as this year. In that case, GBP/USD could advance and perhaps even break above the quadruple top of 1.3895.
On the other hand, CPI has had its misses in the recent past, and perhaps previous price pressures resulted in weaker demand and in turn, lower prices. If inflation rises only to around 2.5%, it would allow the BOE more breathing room. Officials could wait to see the full impact of the end of the furlough scheme before being pushed by inflation to raise rates. In that case, the double-bottom of 1.3725 would be in danger.
There is also some middle ground, but it is limited. An "as-expected" figure of 2.9% or 2.8% could be considered neutral for pound movements. However, the pandemic has resulted in substantial differences between what economists expect and real outcomes.
Conclusion
UK inflation figures are critical for the Bank of England´s path of rate hikes. A figure of 3% or higher would send sterling higher while something closer to 2.5% would pound the pound.
Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers. The author will not be held responsible for information that is found at the end of links posted on this page.
If not otherwise explicitly mentioned in the body of the article, at the time of writing, the author has no position in any stock mentioned in this article and no business relationship with any company mentioned. The author has not received compensation for writing this article, other than from FXStreet.
FXStreet and the author do not provide personalized recommendations. The author makes no representations as to the accuracy, completeness, or suitability of this information. FXStreet and the author will not be liable for any errors, omissions or any losses, injuries or damages arising from this information and its display or use. Errors and omissions excepted.
The author and FXStreet are not registered investment advisors and nothing in this article is intended to be investment advice.
Recommended Content
Editors’ Picks
EUR/USD trades weak below 1.0800 amid Good Friday lull, ahead of US PCE
EUR/USD remains depressed below 1.0800 after soft French inflation data, amid minimal volatility and thin liquidity on Good Friday. The pair keenly awaits the US PCE inflation data and Fed Chair Powell's speech for fresh hints on next week's price action.
GBP/USD holds steady above 1.2600 as markets stay calm on Good Friday
GBP/USD trades sideways above 1.2600 amid a typical Good Friday trading lull. A broadly firmer US Dollar could keep any upside attempts limited in the pair ahead of the US PCE inflation data and Fed Chair Powell's appearance.
Gold price sits at all-time highs above $2,230, US PCE eyed
Gold price hit all-time highs at $2,236 on Thursday to finish Q1 2024 with a bang. Most major world markets, including the US are closed due to Holy Friday, leaving volatility around Gold price highly subdued. US PCE inflation and Powell are awaited.
Jito price could hit $6 as JTO coils up inside this bullish pattern
Jito (JTO) price has been on an uptrend since forming a local bottom in early January. Since then, JTO has revisited the key swing point formed in early December, suggesting the bulls’ intention to move higher.
Key events in developed markets next week
Next week, the main focus will be inflation and the labour market in the Eurozone. We expect services inflation to be impacted by the easter effect, while the unemployment rate to be unchanged.