Sterling Wobbles After Higher Inflation

Mixed British data this week has driven the pound strongly downward against the euro while other major pairs with sterling have been mostly less active. British headline and core inflation on Wednesday 18 October were slightly higher than expected although retail sales on Friday 20 October declined more than expected despite being less bad than last month. This post summarises recent news affecting the pound and takes a quick look at the charts of EURGBP and GBPJPY.

The overall impression from this week’s data on British inflation remains that the Bank of England still needs to make more progress on stabilising prices. While inflation in the UK has come down this year, it remains more than triple the target of 2% and significantly higher than all other G7 countries:

Looking at the chart, one can also notice that the decline hasn’t been as strong or as consistent as in other major countries such as the USA. The situation of rates higher than headline inflation now seems very unlikely to occur in the UK before the end of the first quarter of next year, but that could change quickly depending on the prices of oil and other imported raw materials.

Based on GDP data, the UK still seems to be heading for stagnation rather than recession. The last quarter of contraction in the British economy based on this measure was the third quarter of last year, a barely negative 0.1%. Since then every quarter has recorded at least 0.1% growth. Conversely, the picture from retail sales is bleaker:

Although data on 20 October showed the smallest decline in retail sales since spring last year, the contraction of 1% was significantly worse than the consensus of only 0.1%. Although job openings have been shrinking for several months, annual change in earnings has remained strong to the puzzlement of the BoE. ‘Higher for longer’ remains the dominant expectation, but it’s still very difficult to predict whether a further hike of the bank rate might occur on 2 November.

Euro-pound, Daily

The euro is relatively more popular than the pound as a haven so has seen some inflows as a result of conflict in recent weeks, but the incipient breakout upward seems overall to be more of a technical movement. Sentiment in the EU seems to be improving somewhat, with ZEW’s index moving up more than 10 points in the latest release.

The obvious medium-term target would be 88.5p, the area of April’s highs, but the British job report on 24 October might drive volatility and possibly a correction if the figures are better than expected. That might suggest a move back to the value area between the 20 and 50 SMAs followed by continuation upward. The primary intrigue remains the vote by the Monetary Policy Committee on 2 November: a hike still looks unlikely but another 4-5 split could suggest hawkishness in the last meeting of the year shortly before Christmas.

Pound-yen, Daily

Compared to the usual, pound-yen was relatively calm since the beginning of summer, consolidating extremely strong gains in the second quarter as traders await a possible intervention by the Bank of Japan or the government. Various participants view ¥150 to the dollar as a possible ‘red line’ for an intervention, so with the price of dollar-yen only slightly below there it remains possible that the authorities could step in.

However, the yen’s weakness against most other major currencies does reflect fundamentals fairly closely. Despite inflation remaining above target for 18 consecutive months, the Bank of Japan has stood firm against calls to tighten policy.

Low volatility in recent weeks makes GBPJPY a less than ideal option for most traders at the moment, but the long consolidation might mean a stronger and deeper correction if the BoJ does intervene. If not, a retest of the latest high around ¥186.50 could occur. As for euro-pound above, the focus now is on the British job report on Tuesday 24 October and slightly further ahead the BoE’s next meeting on Thursday 2 November.

The opinions in this article are personal to the writer. They do not reflect those of Exness or FX Empire.