The pound has edged higher today after annual inflation in the UK surged to its highest level in 30 years. The bad news is that price pressures are likely to intensify even more, before falling back. The pound’s somewhat muted response suggests investors are not sure whether the impact of the Bank of England’s response in terms of policy tightening will outweigh the negative impact falling real wages will have on the economy. Still, the upcoming rate hikes should help support the pound, especially against weaker currencies like the Japanese yen. Not only does the Bank of Japan remain one of the most dovish central banks out there, but as an oil consumer nation, rising crude prices are clearly negative for the Japanese economy.
So, the GBP/JPY should remain fundamentally supported.
Source: ThinkMarkets and TradingView.com
The GBP/JPY has been making higher lows and higher highs in recent months. With price holding above both the short-term 21-day exponential moving average as well as the longer term 200-day simple moving average, the technical outlook remains objectively positive. Thus, I would favour looking for bullish trades on this pair. I reckon we will soon see a breakout above last year’s high of 158.20ish.
UK CPI highest since 1992
The pound’s latest gains came after data revealed this morning that consumer prices in the UK rose to an annual pace of 5.5% in January, its highest level since March 1992. The data beat expectations, while other measures of inflation, such as the RPI (7.8% y/y) also topped forecasts. The sharp rise in energy bills that will hit consumers in April means price pressures are only likely to exacerbate.
Key economic data coming up this week
Wednesday
- CPI estimate Canada
- US retail sales, industrial productions and FOMC meeting minutes
Thursday
- Australian employment data
- FedSpeak: FOMC members Bullard and Mester
Friday
- Retail sales data from UK and Canada
- FedSpeak: FOMC members Waller and Williams
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