Economic data released by the British government earlier today showed that the year-on-year consumer price index has risen by more than 2%: 2.3%, to be precise. This was the fastest rise since April 2013, and an overshooting of the Bank of England’s 2% inflation target that is one of the cornerstones of its monetary policy. However, like the U.S.A.’s Federal Reserve, the Bank of England has stated that it is prepared to turn a blind eye to a temporary “overshooting” of the target. To me, this smacks of trying to “have your cake and eat it” by saying 2% is the limit but we won’t do anything when its breached, although it could be argued that it’s fair enough provided the Bank maintains some credibility by being prepared to tighten monetary policy if the level remains above 2% in a sustained way, or continues to rise strongly beyond 2.3%.
This is a particularly interesting development when we consider that just last week, the market was surprised to see one of the nine committee members responsible for the Bank of England’s interest rate vote in favor of a rate hike. The fact that inflation is above the target will increase the case for a rate hike, and this is probably the major reason why the Pound rose following the data release to new highs.
Turning to the technical picture in the GBP/USD currency pair, it has to be said that the pair is still within a long-term consolidation between about 1.2700 and 1.2000. As a rough rule of thumb, I say that if the price is holding up above 1.2500 by mid-April, there will be a bullish technical picture suggesting a further rise. A rate hike would be the perfect accompaniment for bulls, but such a hike is very unlikely to happen next month. There is more chance of a hike in May, but that is still a minority expectation.
Looking at the economic fundamentals, there a dark lining to some of the optimism it is possible to conjure up over the British economy. The Pound has fallen by a lot against the currencies of Britain’s major trading partners, and this can be expected to stoke inflation which is now exceeding earnings. As Britain imports so much of its consumption, prices will rise and earnings are likely to fall in real terms, getting behind inflation let alone prices. This could leave the Bank of England trying to control a resurgent inflation with rate hikes that the real economy can ill afford.
