The wonderfully normal Bank of England – Commerzbank

Inflation rose sharply in the United Kingdom in April – more than analysts had expected. This was reported yesterday by the Office for National Statistics (ONS). The surprisingly high increase was broad-based. This is exactly what is meant by 'inflation,' and it is the task of the monetary authorities to control it. As a result, the pound rose, Commerzbank's Head of FX and Commodity Research Ulrich Leuchtmann notes.

BoE might actively respond to unexpected inflationary developments

"This mechanism works so well in the UK because everyone is convinced that the Bank of England (BoE) will actively respond to unexpected inflationary developments. Recent events, but also the communication of the 'old lady of Threadneedle Street,' have strengthened confidence in the BoE's responsiveness. Since the eve of the last BoE meeting, market expectations regarding the future BoE interest rate path have shifted significantly upward. Yesterday's inflation data justify this market view and the strength of the GBP that we have seen recently."

"This is where the advantage of a monetary policy that has earned trust in its responsiveness through reliable work comes into play: because a strong pound (the third strongest G10 currency since that BoE meeting, surpassed only by the Scandinavian currencies!) dampens domestic inflation, the foreign exchange market is doing part of the BoE's job. So to speak. And so it is justified that a little bit of interest rate cut expectations are still priced in."

"Of course, yesterday's market reaction also showed that the effect of the revision of interest rate expectations is slowly wearing off. Cable did gain ground yesterday, but this was more a USD story than GBP-driven. The strong inflation figures did not help against the euro or the G10 average. For me, this means that for the pound to continue to gain ground across the board in the coming days and weeks, something new will have to happen."