GBP In Demand As Inflation Soars

The British Pound is catching a bid again today following news that UK inflation hit its highest level in thirty years last month. The Office for National Statistics reported this morning that headline UK CPI rose by 4.8% month-on-month in December, up from 4.1% in November. Annually, inflation surged to 5.4% in December, up from 5.1% in November. At this level, UK inflation is the highest it’s been since 1992. Additionally, core inflation, which strips out food and energy prices, was also seen higher at 4.2%, up from 4% prior.

Energy Price Impact

Looking at the breakdown of the data, the biggest upward contributions came from increased costs in household services as well as transport costs. These two inputs contributed 1.31% and 1.29% respectively. The surge in transport costs is linked to higher energy prices which continue to cause a major headache for UK consumers.

Alongside higher energy prices, inflation has also been driven higher by ongoing supply chain issues linked to regulatory changes due to Brexit as well as staffing shortages and other disruptions caused by COVID. Record levels of omicron infections over the last month have seen huge numbers of staff off work due to illness or the requirement to isolate.

Inflation Running Above Forecasts

While the BOE has acknowledged the surge in inflation, forecasting CPI to peak around 6% in April, the fear is that inflation is now running ahead of the bank’s own forecasts. With this in mind, traders are bolstering their BOE rate hike expectations. The bank lifted rates for the first time since the pandemic in December and traders are now expecting the bank to announce a further rate hike at the upcoming February meeting.

Upside Risks

With energy prices still on the rise and COVID disruptions and Brexit-related issues still creating issues within the supply chain, the near-term outlook for inflation remains fraught with upside risks. With this in mind, the market will be looking for the BOE to take a more hawkish stance in February with a larger rate hike of .25% as well as an announcement on tapering.

Technical Views

EURGBP

The decline from December 2021 highs has seen the market breaking below the bear channel support level with price currently sitting in a tight block of consolidation atop the .8336 level. With both MACD and RSI turned lower here, the focus is on a further break lower towards the .8281 level next. To the topside, bulls will need to see price break back above the .8429 level to alleviate near term bearishness.