The pound has gained against the majority of the world’s most actively traded currencies today on news that consumer prices rose 4.4% year on year last month. The forecasted figure was 4.2% and investors have again started to speculate that the Bank of England may have to raise interest rates to combat elevated price pressures.
The acceleration in UK inflation is the fastest seen for more than two years and could represent a serious problem for the Bank of England. The BoE has made it quite clear that it is not their intention to hinder economic growth by raising interest rates in the short term. However they face a difficult task ahead as they try and avoid losing face over becoming inflation complacent.
It is unlikely that the BoE will act on rising inflation until the picture over UK GDP becomes more clear. The negative growth figures in Q4 of last year damaged confidence in the market and the BoE will want to see the results of the preliminary GDP figures for Q1 due in April before making the decision.
Tomorrow sees the release of the minutes from the last BoE meeting. It is likely that the split amongst MPC members will be the same as last month however any surprise could spark volatility as traders focus on interest rate expectations.
The UK budget is also due for release tomorrow, yet the announcement from the chancellor will likely be overshadowed by the BoE minutes.
Headlines due in the broadsheets tomorrow regarding elevated inflation combined with austerity could weigh on the pound. We would expect the pound to potentially rally further against the Euro as concerns over Eurozone sovereign debt come back into focus. The rally in the cable pair may however run out of momentum and retrace back into a more normal trading range.
