Pound Rises on Inflation Data But Gains May Be Shortlived


pound exchange rate forecast 1

The Pound rose by ten basis points versus the Dollar and a similar amount against the Euro on Tuesday after UK Inflation data came out higher than expected. 

Higher inflation will increase bets that the Bank of England (BOE) will raise interest rates which will support the pound by attracting more inbound investment.

The data showed inflation rose by 1.6% in December, which was well above the 1.2% in November and the 1.4% forecast.

Core inflation which has the volatile food and energy components stripped out increased by 1.6% from 1.5% expected, and 1.4% in the previous month.

“The jump in inflation is hardly unexpected, even with it beating expectations. Cable looked to be leaning that way before the figures and has since touched 1.2189,” said Forexlive’s Ryan Littlestone in response to the figures.

“The ONS note that Airfares and food were the biggest contributors,” he added.

“The biggest difference between this and what we saw in the Eurozone numbers is the jump in the core.

“As I've mentioned previously, prices always go up quicker than they come down so we're maybe seeing some of the currency-led price rises coming through quicker than they would the other way,” concluded Littlestone.

The Pound has risen over a hundred points versus the Dollar on Tuesday morning alone, and the inflation figures helped bump it even higher.

Sterling’s gains were disproportionately small given the strong upside jump in inflation, however.

This is because the rise in inflation is mainly being put down to the effect of the weaker Pound rather than due to increased growth.

Indeed, continued rises in inflation could have a negative impact on the economy unless they are accompanied by growth as they will stretch already tight household budgets.

Alex Lydall, of FX specialists Foenix Partners, said the inflation figures may give "artificial strength to Sterling in the short-term", but would also raise concerns.

The rapidity of the rise suggests a trajectory which will soon overshoot the Bank's 2.0% target.

"As inflation is boosted towards the Bank of England’s target of 2%, the trajectory is worryingly fast, potentially leading to levels post 3% in the medium term - something which Mark Carney will not welcome as wages could likely stifle in comparison for the average UK worker," said Lydall in reaction to the figures.

Brexit Speech Overshadows

The next significant event for the Pound is the speech about Brexit from Theresa May at 11.45 GMT.

Traders are betting the speech will have a hard Brexit bias given her most recent comments, in which she said the Uk would not be keeping little bits of the EU, and "Brexit means Brexit".