British Pound Down Even as Hot CPI Data Beckons BOE Rate Hikes

[MongiIG]

UK CPI, INFLATION, BANK OF ENGLAND, BRITISH POUND – TALKING POINTS:

• British Pound down despite hotter-than-expected inflation data
• Spotlight turns to fiscal policy as Sunak readies Sprint Statement
• GBP/USD has a long way to go to neutralize the downtrend

 

The British Pound spiked briefly higher, then slipped to session lows as hotter-than-expected UK CPI data failed to make an impression on Bank of England policy bets. The core rate of inflation rose to 5.2 percent year-on-year in February, topping baseline expectations of a more modest 5 percent result.

While this marks the fastest pace of price growth in 30 years, the data’s implications seem to be adequately embedded into the markets’ Bank of England policy expectations. These call for between 5-6 further rate hikes of 25bps each before the end of the year. That seems to be aggressive enough for traders, at least for now.

British Pound index 1min chart created with TradingView

Looking ahead, all eyes are on the Chancellor of the Exchequer Rishi Sunak, who will deliver the government’s Spring Statement. It is expected to deliver a raft of programs to help households cope as inflation drives up cost-of-living expenses. Energy costs may be a particular focus.

This makes for a tricky policy mix. Embracing an expansionary fiscal stance runs the risk of fanning the flames of price growth, compounding the issue further and demanding still-swifter action from the BOE. To that end, traders will be keen to weigh up the ambition of Mr Sunak’s proposals.

 

GBP/USD TECHNICAL ANALYSIS

Prices have staged a recovery following a test of the 1.30 figure. The bulls now face a formidable challenge on approach to a dense resistance area capped at 1.3412. Breaking above that may set the stage for a test of 1.3523. Neutralizing the dominant downtrend seems to demand a further push north of the 1.36 mark, however.

On the downside, initial support looks to be anchored at 1.3161. Taking that out sees a minor inflection point at 1.3082 along the way back to challenge the key swing bottom at 1.30.

GBP/USD daily chart created with TradingView

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--- Written by Ilya Spivak, Head of Greater Asia at DailyFX.com. 23rd March 2022