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GBP jumps on inflation’s spike

Summary:

  • UK’s inflation readings for August come in above forecasts across the board
  • BoE could slightly tighten up its stance at its Thursday’s meeting
  • GBPUSD pops up to the highest level since September 2016

UK inflation sped up in August by far more than estimated coming in at 2.9% yoy being the highest rate since May this year. An increase has been boosted by higher prices in sectors such as clothing and footwear, household and communication.

link do file download linkUK inflation accelerated to 2.9% yoy while the core measure proved to be the highest since 2011. Source: Bloomberg, XTB Research

First of all, let’s recall that renewed downward pressure on the pound in the last month could have partially brought about a significant pick-up in inflation numbers in August. Depreciation of the currency increases import costs which pushes up prices in the UK, even as domestic demand remains quite muffled. If inflationary pressures go in tandem with an increase in wage growth, it could enhance the case for a rate hike. Albeit, wage growth has been sub-par of late weighing on consumers spending. For that reason tomorrow’s report from labor market should be scrutinized to assess how real wage growth has actually evolved.

Let us also add that core inflation came in at 2.7% yoy against the forecast at 2.5% yoy, meaning the highest rate since 2001. That kind of releases are likely to show clearer frictions within the MPC which is scheduled to vote on a possible change in rates in upcoming hours. Moreover, the BoE is expected to modestly tighten up its still dovish stance in response to lowering expectations seen by the market as far as a rate increase is concerned. Even as higher inflation could eat into real wage growth once again, we have to wait for the labor market report in order to receive a complete signal from the beleaguered UK’s economy. At the end of the day, let’s remind that the UK reported the slowest growth the second quarter among the G7 being restrained by sluggish consumption, the lion’s share of GDP growth.

link do file download linkThe GBPUSD has gained a foothold following higher than expected inflation metrics in August. Source: xStation5

The British pound has jumped to the highest level since September 2016 against the greenback in response to renewed inflationary pressures. The pair has already breached 1.3250 and could eye as high as 1.3450. That said, if wage pressures show a dormant pace of growth, it could call into question today’s rise in the pound.

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