British pound under pressure as UK inflation data sends mixed messages to markets

The British pound following today's inflation data

The British pound sterling (Currency:GBP) has not found today's inflation data to its taste. Our earlier quotes showed the UK currency was under pressure ahead of the inflation data - so perhaps there are other factors behind today's sell-off?

We see:

The pound to euro exchange rate is 0.52 pct in the red at 1.1703.
The pound to US dollar exchange rate is 0.35 pct lower at 1.5666.

Note that the above are spot market quotes; your bank will add their own spread to these wholesale market numbers. However, an independent FX provider will guarantee to undercut your bank's offer, thus delivering more currency. Please find out more here.

Headline inflation increases

The Office for National Statistics said annual CPI rose to 2.7 pct in May from April's 2.4 pct, above economists' forecasts of 2.6 pct in a Reuters poll.

"Generally, a high reading is seen as positive (or bullish) for the GBP, while a low reading is seen as negative (or Bearish)," say Alpari UK.

Things have not quite worked out as expected for the sterling bulls then.

But, PPI comes in below expectations

The headline CPI has increased - this should have boosted sterling. So why is sterling not higher. Well, there are other numbers that suggest inflationary pressure may be more subdued in some sectors.

Thus, the Bank of England could still be more active on the monetary front when Carney takes over. This is the ultimate worry for sterling.

However, May's Producer Price Index - Output (YoY) - came in below expectations at 1.2 pct. Analysts had expected a reading of 1.5 pct.

Producer Prices Index Core Output, which excludes volatile items such as food and energy, also showed less price pressure than expected. The reading came in at 0.8 pct, below expectations for an increase of 0.9 pct.

"Britain does not have much of an inflation problem, if the output price data are anything to go by. Factory gate prices rose by just 1.2% in the 12 months to May. But consumer price inflation remains uncomfortably high," says David Smith on his Economics UK blog.

Smith goes on to say: "The drop in inflation to 2.4% in April was, it seems, a blip. The rate rose to 2.7% in May, in line with its remarkably stable rate between October and March. This is disappointing, given that it is the last inflation number to be published in Sir Mervyn King's tenure as governor. The pattern of above-target inflation of the past few years persists and it will be some time before the 2% target comes back into sight."