British Pound remains on the defensive as UK CPI meets expectations

GBP/USD retreats from session highs near 1.3500 after the release of UK inflation data.
UK CPI accelerated in line with the market consensus in August, while producer prices beat expectations.
Fed-BoE monetary policy divergence is keeping Pound rallies limited this week.

Guillermo Alcala FXStreet

The British Pound (GBP) ticks higher against the US Dollar (USD) on Wednesday, although the GBP/USD pair retreated to 1.3480 from session highs near 1.3500 after the release of the UK Consumer Prices Index (CPI) data for August. More broadly, the Pound remains 0.3% lower this week so far, as markets brace for a Federal Reserve (Fed) rate hike while the Bank of England (BoE) is expected to leave rates on hold on Thursday.

Consumer inflation accelerated to 0.5% in the UK in August from 0.3% in July, while the yearly CPI climbed to 3.1% from 2.9%, according to levels released by the UK Office for National Statistics on Wednesday. The core CPI has remained growing at a steady 2.6% pace, in line with market expectations,

Producer prices, on the other hand, beat forecasts, with the input Producer Price Index (PPI) rising to a 6.1% year-over-year (Y-o-Y) rate in August from 4.9% in July, above the 5.4% market consensus, and the Output PPI accelerating to 3.7% Y-o-Y from 3.1% in the previous month. The market had anticipated a softer increase to 3.3%.

These figures, however, do not alter the view that the Bank of England (BoE) will leave its benchmark interest rate steady at 3.75% on Thursday. The Monetary Policy Committee is highly expected to show divergences, but recent comments from Governor Bailey dismissing the idea that rate hikes are inevitable have dampened hopes of any immediate tightening move.

A Fed rate hike is nearly fully priced

In the US, on the contrary, the Federal Reserve (Fed) is widely expected to hike interest rates by 25 basis points later in the day. A strong US Nonfarm Payrolls (NFP) report in August, coupled with the hot inflationary figures released last week, has prompted futures markets to price in a 92% chance of a rate hike and a 70% probability of at least one more hike before the end of the year.

Bearing in mind the Fed Chairman Kevin Warsh's distaste for forward guidance, the market will be looking at the central bank's interest rate projections, the so-called "dot plot," to confirm expectations of further monetary tightening in the near-term.

In that sense, analysts at TD Securities anticipate that the dot plot "may show a lower number of hikes than markets anticipate." The experts note that, given the recent repricing of the hiking path, the US Dollar might go through "some knee-jerk weakness" in the immediate aftermath.

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

Core Consumer Price Index (YoY)

The United Kingdom (UK) Core 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. The YoY reading compares prices in the reference month to a year earlier. Core CPI excludes the volatile components of food, energy, alcohol and tobacco. The Core CPI is a key indicator to measure inflation and changes in purchasing trends. 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?

Author

Guillermo Alcala

FXStreet

Graduated in Communication Sciences at the Universidad del Pais Vasco and Universiteit van Amsterdam, Guillermo has been working as financial news editor and copywriter in diverse Forex-related firms, like FXStreet and Kantox.

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