GBP/USD Fundamental Forecast – December 13, 2016

The British Pound is trading higher early Tuesday after the release of better-than-expected U.K. inflation data. The GBP/USD surged to 1.2723 before retreating to 1.2710, up 0.0040 or +0.31%.

According to the Office for National Statistics (ONS), U.K. inflation jumped to 1.2 percent year-on-year in November, barely betting analyst expectations for a 1.1 percent increase. However, the number is the highest since October 2014 and well above the 0.1 percent reached a year ago in November 2015. It also reverses the unexpected miss last month when the figure came in at 0.9 percent, missing the 1.0 percent forecast.

The details of the report showed that the key drivers of inflation last month were clothing, recreation and culture. The number also included energy and food prices, which tend to be volatile.

Core CPI, which excludes energy and food, came in at 1.4 percent. This was also above the 1.3 percent forecast. The retail prices index or RPI also came in above expectations at 2.2 percent versus 2.1 percent.

Gilts dipped to session lows on the news as yields rose, making the British Pound a more attractive currency. The FTSE 100 was positive, but there is no evidence that this had anything to do with the CPI data.

Other analysts are saying that U.K. inflation may well be on its way to the 2 percent target by the first quarter of 2017. However, this may not be enough to sway the Bank of England into taking any action at Thursday’s Bank of England meeting. It is widely expected to leave interest rates unchanged. Furthermore, Governor Mark Carney emphasized in a speech last October that, if necessary, he would be willing to tolerate an overshoot in inflation for a period in order to support the economy.

Other agree with Carney assessment because they expect a deceleration in near-term U.K. economic growth which should impede any need for monetary policy tightening. According to the British Chamber of Commerce (BCC), gross domestic product (GDP) will pull back to 1.1 percent in 2017 from 2.1 percent this year. Furthermore, it also lowered its forecast for 2018 to 1.4 percent from its earlier estimate of 1.8 percent.

Trading is expected to be light ahead of Wednesday’s Fed interest rate and monetary policy announcement. However, the GBP/USD hasn’t been reacting negatively to the expected rate hike at all lately. Therefore, I have to conclude that today’s inflation data should underpin the Forex pair today.

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