Pound Sterling Finds no Relief in Consensus-Busting Inflation Data Release

The British Pound is seen under pressure against most of its rivals on Tuesday, May 16.

Not even a consensus-beating inflation data release was able to assist the UK currency from registering deep losses against the Euro which is outperforming on global FX markets which suggests other issues are at play in the market.

UK inflation data for April has been released by the ONS and it has shown prices are rising faster than expected.

Annualised CPI inflation for April was forecast to read at 2.6%, up from the 2.3% seen in March.

Instead, it read at 2.7%, which while being above consensus estimates is where the Bank of England said it would be in its forecasting guides.

Monthly inflation rose by 0.5% where a reading of 0.4% was forecast.

The rule of thumb is that should data come in above expectation Sterling will rally, and it will fall on weaker figures. However, the Pound remained at levels seen ahead of the release with GBP/EUR lower at 1.1715 in the face of broader Euro strength.

The GBP/USD is at 1.2931 amidst broad-based US Dollar weakness.

As we note below, foreign exchange traders are more likely than not to be interested in the mid-week release of wage data and Thursday's retail sales release.

The ONS says air fares were the main contributors to the increase in the rate in April 2017, although this balanced out a downward effect of similar magnitude in March 2017 and is due to Easter falling later than last year.

Analysts at Capital Economics, the independent economic research consultancy, say inflation levesl could be nearing their limit.

"The sharp rise in UK CPI inflation mainly reflected a number of one-off factors and we think that this has brought it close to its eventual peak," says Scott Bowman, UK Economist at Capital Economics. "The sharp rise was mainly due to factors that, while they won’t be reversed, shouldn’t be repeated."

Capital Economics say inflation should increase a little further in the coming months as the peak impact of the fall in the pound approaches and utility companies complete their price hikes.

There were further signs of exchange rate pass through – with an increase in inflation for most import-intensive components – and the initial utility price hikes in this month’s results.

"As a result, we think that CPI inflation will reach a little over 3% before the end of the year. However, there are few signs of domestic cost pressures building," says Bowman.

Why the Pound Didn't Get a Boost from the Inflation Data

In some quarters, expectations for a big move in Sterling were high.

“The GBP/USD recovered above the 1.2900 mark. The sudden appetite loss in US Dollar will likely prevent the post-Bank of England downside correction from developing further. The $1.30 hurdle is back on the radar and could be successfully taken out today, if the UK’s inflation print is in line with analysts’ expectations,” says Ipek Ozkardeskaya at London Capital Group.

We cautioned ahead of the release that markets will take a relatively sanguine view to inflation and will rather save their energy on the wage data due out mid-week as markets look for evidence that suggests the economic slowdown seen in the first quarter of 2017 has continued into the second quarter.

After all, it is wage growth that ultimately drives the kind of inflation the Bank of England is interested in.

If wages are rising then inflation is likely to rise as spending power increases. This kind of inflation is separate to that generated by global fuel prices and moves in the exchange rate and it can therefore be controlled by the Bank of England.

To fight rising prices the Bank would be expected to raise interest rates, which would in turn see support for the Pound grow.

Until we see wages pick up, the Bank will likely look through short-term fluctuations in the headline inflation data.

The weekly wage data for March is expected to show an increase to 2.4%, from 2.3% in February, however there is a chance that a larger than expected figure for jobs growth in the three months’ to March, which is expected to come in at a lacklustre 21k, could see a higher figure for wages.

“We believe that an upward surprise in wage and jobs data could be the key driver for the Pound this week, with better than expected numbers driving GBP/USD into a new paradigm between 1.30 and 1.35 as we wait for the UK election on June 8th,” says Kathleen Brooks Brooks at City Index.