Pound Euro and Pound Dollar Exchange Rates Maintain Positive Bias as UK Inflation Heralds a Winter Interest Rate Rise

The implications of rising inflation on the Bank of England's (BoE) monetary policy is key to the future of GBP exchange rates; markets are betting the Bank can no longer sit on record low borrowing rates while inflation begins to creep higher.

The following rates are noted at the time of writing ahead of the weekend:

• The pound to euro exchange rate is unchanged on a daily basis at 1.2643. We are seeing a relief rally in the EUR at present after days of decline.
• The pound to dollar exchange rate is unchanged at 1.7103.
• The pound to NZ dollar rate is 0.15 pct lower at 1.9702. (The NZ dollar tumbled on speculation of a slump in dairy prices and inflation data.)
• The pound to Aus dollar exchange rate trades 0.32 pct lower at 1.8232.
• The pound to Canadian dollar rate trades 0.06 pct lower at 1.8400. (For latest CAD forecasts we have some interesting insights here).

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UK inflation data ticks up, improving GBP outlook

Inflation management is the key remit of the Bank of England, and the team on the Monetary Policy Committee will have shed a bead of sweat on news that Consumer Price Index (YoY) (Jun) read at 1.9%, markets had predicted a reading of 1.6%, as compared to last month's 1.5%.

This is a big jump and will place further pressure on UK households which are still seeing their pay packets eroded by rising prices.

Higher interest rates are a sterling-positive and today's inflation will bolster bets that the first rise is just months away.

The outlook for sterling has turned postive once more on today's data and we could soon start to see the 2014 highs in a number of the GBP currency pair's revisited.

Global forex: Tuesday's action

As widely expected, the BoJ maintained status quo in July.

The monetary base will expand at the annual pace of 60-70 trillion yen, while the inflation forecasts are unchanged with the CPI y/y seen at 2.1% in fiscal year 2016, the core CPI at 1.9%.

"JPY crosses were mixed in Tokyo; Nikkei ended the day in green. USD/JPY advanced to 101.65 with trend and momentum indicators still marginally bearish. Offers are seen pre-101.75 (21-dma), then 101.93/96 (200-dma / daily Ichimoku cloud base), light stops are eyed above. The key support zone stands at 100.76/101.07 (2014 low / July 10th low)," says a comment from Swissquote Research.

The RBA minutes expressed nothing surprising, yet AUD/USD was sharply offered as Europe walked in.

"The pair sold-off to 0.9371, setting the negative intraday tone. Offers trail pre-94.00 (21-dma), first line of support is set at 0.9339/54 (Fib 61.8% on Oct’13-Jan’14 pullback / 50-dma). Relatively good news out of China should help capping the downside," say Swissquote.

In China, the foreign direct investments increased by 0.2% on year to June, new Yuan loans and all-system aggregate financing expanded faster than expected. The only bad news is that the non-financial outbound direct investments declined by -5%. The M2 money supply increased 14.7% while foreign reserves reached $3,990.0bn.

The ECB President Draghi testified before the European lawmakers in Strasbourg for the first time after May elections. Mario Draghi reiterated that the inflation should recover gradually in 2015/16, that the ECB will keep the policy accommodative and is ready to use unconventional tools as needed.

The 1 trillion euros worth TLTRO loans may be provided as soon as this month, the expansion in the ECB balance sheet as a result should “put downward pressure on interest rates on the money markets” he said.

The euribor interest rate futures legged down to 99.800, EUR-complex was somewhat squeezed yet managed to hold ground. EUR/USD remained offered above the 21-dma (1.3620), bids at June-July ascending base kept the pair ranged above 1.3600.

The FOMC Chair Yellen’s testimony is important for the USD-leg today and tomorrow. The bias will remain marginally positive for a daily close above 1.3595 (MACD pivot).

"EUR/GBP tests the 21-dma (0.79745) on the upside. Decent option related offers wait to be activated below 0.79000/300 for today expiry; the upside is not crowded leaving room for deeper upside correction. Next resistance stands at 0.80295 (Fib 76.4% on Mar-Jul drop). EUR/JPY remains offered pre-138.57 (21-dma)," say Swissquote.