The headline UK CPI came at 3.1% in November, which is the highest since March 2012. The GBP/USD gained initially on the release, but struggled to keep gains and met the sell interest in the 1.3380 area.
The CPI reading peaked above 3.0%, which means the BoE chief will have to write an explanation letter to the finance minister. Basically, the faster inflation rises, the more aggressive should be monetary tightening. So today’s numbers are theoretically GBP-positive. But there are a few reasons why the currency reaction is so muted.
Firstly, the market is still focused on Brexit drama which despite the latest progress still involves risks and uncertainties. That’s why traders tend to sell GBP on rallies lately. Secondly, the pound is nervous ahead of the upcoming events – tomorrow’s employment and weekly earnings data as well as the BoE meeting on Thursday.
Despite today’s CPI figures, the market participants doubt that Mark Carney will embark on a more aggressive rhetoric after a so-called “dovish hike” in November, as many Brexit issues are still unresolved and pose risks to the economy.
Nevertheless, there is still a chance that the Central Bank will note the progress in Brexit negotiations and hint at the need of faster policy tightening due to the fears of inflation overheating. If so, the pound may attract buyers in the area of December lows above 1.33, which are attractive for opening longs. In this scenario, the initial bullish target is 1.3380. The move above will introduce scope to 1.34 and higher.
By Helen Rush
Senior Analyst at Capital Markets