Pound Hits 7 Week High Against Dollar and Momentum is Picking Up
The Bank of England is tipped to raise interest rates in February following the release of data showing core inflation is moving higher.
The UK's pound sterling soared to a July 1 high against the dollar, demonstrating how a little inflation goes a long way for currencies.
"In a low inflation world, U.K. prices unexpectedly ticked up to 0.1% in July, which was enough to keep Britain poised to raise interest rates in the months ahead," says Joe Manimbo at Western Union.
For the foreign exchange complex it was not the headline inflation figure that mattered though.
“More importantly, core inflation (which excludes energy, food, alcohol and tobacco) jumped 0.3pp to 1.2% yoy. Core inflation now lies above its 1999-2007 average of 1.1% when the Bank Rate averaged 4.8%,” points out Daniel Vernazza, the lead UK economist with UniCredit Bank in London.
In the last few months MPC members have attached particular importance to measures of core inflation as they look-through the temporary impact of the fall in energy and food prices.
Indeed, in July Carney listed a rise in core inflation as one of three pre-conditions for rate hikes.
Latest Pound/Euro Exchange Rates
  | Live: 1.1459▲ + 0.14%12 Month Best:1.2162 |
*Your Bank's Retail Rate
| 1.1069 - 1.1115 |
**Independent Specialist | 1.1299 - 1.1344 Find out why this is a better rate |
* Bank rates according to latest IMTI data.
** RationalFX dealing desk quotation.
The other two – sustained growth above 0.6 per cent per quarter and a continued firming of domestic costs – are also currently on track.
“Looking ahead, we continue to expect core inflation to firm gradually as domestic cost growth outweighs the drag from the appreciation of sterling. As lower oil and food prices begin to drop out of the year-on-year comparison towards the end of this year, we expect the MPC will increase interest rates in February next year,” says Vernazza.
This is around three months earlier than the market expects.
The Bank of England will then increase interest rates by 25bp per quarter – a much steeper path than the market is expecting warns Vernazza.
Our reading of this viewpoint is clear – if Vernazza and his team at UniCredit are correct then the pound sterling will appreciate at a rate that is not yet priced into the FX markets.
We are yet to see the best level of 2015 against the euro tested again but we forecast a breach towards 1.45 should the market buy this rate hike analysis.
Outlook for the Pound to Dollar Exchange Rate
What does the outlook hold for GBP/USD following the data?
Easy Forex tell clients that they are expecting further gains in the short-term and see a pivot point now located 1.564.
"Long positions above 1.564 with targets @ 1.572 & 1.577 in extension," say Easy Forex.
Should the price fall below the pivot at 1.564 then markets should look for further downside with 1.5615 & 1.5575 as targets.
"The RSI has just landed on its neutrality area at 50% and is turning up," say Easy Forex suggesting momentum is returning to favour the British pound.
