British Pound wavers following overshot UK inflation data, higher public debt

GBP/USD wavered around 1.3475 after failing to break one-month highs at the 1.3400 level on Tuesday.
UK inflation grew beyond expectations in September, strengthening the case for a BoE rate hike next month.
The increase in UK Government borrowing might have offset the positive impact on the Pound.

Guillermo Alcala FXStreet

The British Pound (GBP) wavered against the US Dollar (USD) on Wednesday following the release of stronger-than-expected UK Consumer Price Index (CPI) figures and a further increase in UK government debt. The GBP/USD hit session lows at 1.3364 before picking up again to the 1.3375 area, and keeps consolidating the last few days' gains after failing to find acceptance above 1.3400 on Tuesday

UK Consumer Price Index (CPI) rose 0.4% in September, according to data from National Statistics, an inch below August’s 0.5% growth but above market expectations of a 0.3% increase. Year-over-year (Y-o-Y), CPI Growth accelerated to 3.5%, from 3.1% in August, also above the 3.4% market consensus.

The core CPI, which strips off the influence of volatile food and energy prices, has also grown above expectations to a 2.8% Y-o-Y rate, beyond the 2.7% market consensus and following a 2.6% Y-o-Y increase in August.

UK government borrowing increased further in September

Alongside inflation data, National Statistics revealed that the UK’s Public Sector Net Borrowing increased to GBP 24.52 billion in September, from GBP 17.25 billion in August. These figures might have stirred old concerns about the elevated UK public debt, putting some bearish pressure on the Pound.

Wednesday's data follows an unexpected decline in the ILO Unemployment Rate on Tuesday, which fell to its lowest level in more than a year. This, coupled with the bright Gross Domestic Product (GDP) data released last week, has cemented market expectations that the Bank of England might hike interest rates at its November 5 meeting.

The US Dollar is showing a moderately stronger stance on Wednesday, with the Dollar Index (DXY) trimming some losses following a five-day selloff. Investors have already priced in a pause at next week’s Federal Reserve (Fed) monetary policy meeting, while concerns about the high Oil prices amid the uncertainty surrounding the Middle East conflict keep channeling safe-haven demand into the Greenback.

Economic Indicator

Consumer Price Index (YoY)

The United Kingdom (UK) Consumer Price Index (CPI), released by the Office for National Statistics on a monthly basis, is a measure of consumer price inflation – the rate at which the prices of goods and services bought by households rise or fall – produced to international standards. It is the inflation measure used in the government’s target. The YoY reading compares prices in the reference month to a year earlier. Generally, a high reading is seen as bullish for the Pound Sterling (GBP), while a low reading is seen as bearish.

Why it matters to traders?

The Bank of England is tasked with keeping inflation, as measured by the headline Consumer Price Index (CPI) at around 2%, giving the monthly release its importance. An increase in inflation implies a quicker and sooner increase of interest rates or the reduction of bond-buying by the BOE, which means squeezing the supply of pounds. Conversely, a drop in the pace of price rises indicates looser monetary policy. A higher-than-expected result tends to be GBP bullish.

Economic Indicator

Public Sector Net Borrowing

The Net Borrowing released by the National Statistics captures an amount of new debt held by the U.K. governments (the financial deficit in the UK national accounts). Generally speaking, if the Net Borrowing is negative, it means the UK Accounts are surplus, and that should be positive for the GBP. While a deficit is generally unfavorable for the economy, a growth in the Net Borrowing is considered as negative, or bearish for the GBP.

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