UK CPI Still Too High

On the back of a higher-than-expected wage growth figure earlier this week, today’s UK CPI data has effectively confirmed a further .25% hike from the BOE next month. Headline CPI was seen cooling to 10.1% in March, down from the prior month’s 10.4% reading, but still well above the 9.8% the market was forecasting. Core CPI, which strips out food and energy prices, was seen holding steady at 6.2%, above the 6% level the market was looking for. With inflation holding around 5x the BOE’s 2% target, there is clearly a need for the bank to press ahead with further tightening.

IMF Recession Warning 

Last week the IMF warned that the UK faced suffering the worst economic performance in the G7 this year as a result of idiosyncratic factors linked to the fallout from Brexit. Elevated inflation was one of the key issues the IMF cited, calling on the BOE to do more to help tame prices. The trade-off, however, being lower growth as a result of a tighter financial conditions.

BOE Implications

The BOE has expressed a desire to move away from tightening with last month’s pivot to a smaller hike intended to lay the groundwork for a subsequent pause. However, with inflation holding on at higher levels, the BOE appears to have little room near-term to refrain from further tightening. Indeed, looking at money markets, traders are now pricing in a further three .25% hikes this year.

Near-Term Outlook

The only real hope for the BOE now is that once the effects of last year’s energy price surge fall out of the annual figures, starting from this month, that inflation will start to cool sharply. With that in mind, next month’s BOE meeting will be closely watched as traders look to the BOE’s message on inflation and expected future rate moves beyond May. Near-term, GBP is likely to remain well supported against currencies where the respective central bank policy looks divergent with that of the BOE.

Technical Views

GBPCAD

Following the correction lower from the 1.6848 level, GBPCAD is now turning higher again. With 1.6538 holding as support, the focus is on an eventual breakout above current highs targeting a move up to 1.7129 next and 1.73 above. Retail market is currently 50/50 this pair, but a push back into highs should encourage greater selling creating better conditions for a breakout.