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Inflation Report

Inflation Report

Yesterday the Pound had a rollercoaster ride against both the USD and the EUR and headed in completely different directions in both. Let’s take a really close look today at the big market mover for the Pound, the UK Inflation report. This, really, can provide a good gauge into forecasting any interest rate rise for the UK.

Earlier in the year, we reported on potential changes in the interest rate and inflationary factors that would be necessary to underpin a rise. Among these were wage increases, which later became a focal point for Bank of England Governor, Mark Carney, in his addresses. The last figure saw this factor rise again at a higher rate than perhaps was expected, at 3.3% increase vs a forecast of 1.7%. So this pushed the GBP higher, principally against the USD leading into Carney’s speech.

For some background: the inflation rate in March was…zero and there was a lot of discussion then about the potential for falling prices. Obviously the UK does import considerable inflationary mechanisms and among these oil is pretty major. So when these prices fall, our prices struggle to gain any ground.  

One of the first factors reported during the meeting was a pullback in growth forecasts from when the Bank of England made the same estimates in February 2015. In 2015, for example, where the forecast in February was for 2.9% GDP growth for the year, now the Bank is forecasting 2.5%. Carney was focused on productivity being very low and analysts quickly pointed out that this is the most troubling of the reported factors yesterday. Then, the critical figure, the monthly inflation rate was….again zero.

The outlook overall was a very up and down trading pattern for the GBP vs the USD particularly as traders absorbed this information. It doesn’t appear that the interest rate decision has been too badly affected by the overall release and so – after periods of choppy, up and down movement – the Pound continued it’s strengthening against the Dollar.

Today in economic releases, we have a quieter day. Really the only releases of note come from the States in the form of Initial Jobless Claims (forecast slightly higher) and the Producer Price Index (forecast to remain unchanged).

Good luck all.

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