This morning’s April CPI inflation report is likely to dictate whether Sterling trades with a positive or negative bias during today’s session.
There were no key data releases related to the UK economy yesterday, which made for a rather dull day on the currency market. The Pound registered a mild set of daily gains against some of the majors but for the most part Sterling crosses ended for the day close to opening levels.
Today’s session should be much more exciting. Analysts predict that the UK consumer price index will print at 1.7% for April, up from a 4-year low of 1.6% in March. If the inflation print matches the forecasts then it is possible that we could see a bit of an increase in demand for the Pound.
The British unemployment rate recently tumbled to a 5-year low of 6.8% and although the Bank of England was quick to temper rate hike bets by commenting on the still present level of slack in the UK labour market, it seems that further improvements in economic indicators will likely lead to increased speculation over the benchmark interest rate.
With inflation currently below the bank’s 2.0% target after spending years above it, the BoE has some ammunition in its argument against raising rates. However, if the consumer price index were to start climbing back up towards and past the 2.0% target then it could become a lot more difficult for Governor Mark Carney and his Monetary Policy Committee to remain on the sidelines.
For this reason a CPI score above the forecasted 1.7% could give Sterling a sizeable boost against the majors.
The Pound to Euro exchange rate (GBP/EUR) is currently trading less than half a cent below the 16-month high of 1.2304 that Sterling reached last week. Any inflation score north of 1.7% would most likely give the Pound the impetus to drive back above 1.2300.
On the other hand, a softer-than-anticipated result – anything below 1.6% – could have a considerably bearish impact on the UK currency. This would give policymakers at the Bank of England much more license to keep rates low for longer and would most likely push GBP/EUR back down to technical support at 1.2230.
Later on in the week demand for Sterling is likely to be influenced by the BoE minutes report, which is expected to highlight policymakers’ concerns over the high level of people becoming self-employed in Britain. There is a chance that the central bank report will show that some members of the nine-man committee are keener than others to start tightening monetary policy but it is more likely that the minutes will be filled with dovish rhetoric.
The other important UK data release is Thursday’s second estimate of British GDP, which is predicted to confirm that the economy expanded by 0.8% in the first three months of the year. Once again there is potential for Sterling gains if the first quarter growth figure is upgraded.
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