GBP rises on higher inflation data
Markets Forex

2 Likes 0 Dislike 2 Replies
1 year ago

New inflation data from UK showed higher than expected rate of inflation, which in turn led to a small rally in GBP prices. In July, the Consumer Price Index rose by 0.6% (annual rate of inflation). Markets inferred that this would restrain Bank of England from pursuing those policies that would cause a further decline in the value of the GBP. (The thinking behind this is that inflation rose at a higher rate - it was expected that CPI would grow by only 0.5% - due to UK's imports becoming costlier as a result of a weaker pound. Thus, Bank of England will have to ensure that GBP does not decline too much since that would make imports even more costly and thus, push inflation even higher.)

Following the release of this inflation data, GBP climbed to 1.1523 against the Euro and 1.2987 against USD.


Posted 1 year ago 2 Likes   0 Dislikes

Hi, 

GBPUSD has moved up further and is currently trading at 1.31616. I feel that it may encounter a resistance at 1.32 (or 1.32142). If it crosses that resistance, then it could go all the way up to 1.335. 

However, I am not convinced with the argument that higher inflation data is good justification for the GBP to climb. Higher inflation would mean that people have less purchasing power. So, demand would go down, leading to lower economic activity, i.e. slowing of economic growth or outright shrinking of the economy.  



Posted 1 year ago 1 Likes   0 Dislikes

That's right, Ralph. In fact, it climbed to 1.304 against the USD and is currently trading only a little lower at 1.30268 vs USD. This is rather interesting. Normally, higher inflation would be seen as a negative and would lead to a decline in the markets (in this case, normally it would have caused the pound to go downwards).