Inflation Rises But Misses Expectations

GBP has been turning higher this week as optimism over the re-opening of the UK economy, as well as weakness in USD, continues to lift sentiment. The latest inflation data out of the UK today showed that consumer prices did indeed rise over March as expected. However, at 0.7%, despite marking a firm increase on the prior month’s 0.4% reading, the data was still below the 0.8% the market was looking for. Core CPI, meanwhile, printed in line with expectations at 1.1% on the month, rising from the prior month’s 0.9% reading.

Fuel Cost Boost

Looking at the breakdown of the data released by the Office for National Statistics, the main driver was the increase in fuel prices, as well as transport and clothing costs which also rose. The ONS noted that "The rate of inflation increased with petrol prices rising and clothes recovering from the falls seen in February. In terms of downward contributions, in its report, the ONS noted that “food staples were lower than at the start of the pandemic”.

Despite the less than expected rise over March, the upward trajectory is encouraging and there is a strong expectation that April’s data will be even higher given the re-opening which came into effect on April 12th. With large swathes of the UK economy now back in action, traders are anticipating an inflationary spike this month, especially in the context of increasing vaccine optimism.

PPI Surges Higher

The other data drawing attention today was the release of the UK PPI for March. The input reading came in well above consensus at 1.3% versus 0.5% expected and 0.9% prior. This continues the theme which has been noted recently of producer’s noting higher input costs. This is again helping lift inflation expectations in the UK as traders anticipate that these increased costs will need to be passed down to the consumer eventually.

Looking ahead today, traders will be waiting on the BOE governor who is due to speak at GMT1 11.30AM. The market will be keen to hear if Bailey addresses the inflation outlook for the UK at all, though he is unlikely to waiver from the BOE’s core message of viewing any inflationary rise as temporary.

Technical Views

GBPUSD

The rally in GBPUSD this week has seen price moving back up to challenge the underside of the broken bull channel and the 1.3997 level. For now, this area is holding as resistance meaning that the range between 1.3676 and 1.3997 is likely to persist. A break above 1.3997 however, will open the way for a test of 1.4248 next.

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