UK Consumer Producer Index Higher Than Forecast Boosts Pound

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The reopening of the UK economy in July fueled an increase in inflation, which jumped to 3.2 percent year over year in August, up from 2.0 percent in July. The Bank of England has copied the Federal Reserve’s script by claiming that greater inflation is just temporary.  Earlier in the day, there was some good news on the employment front in the UK. For the ninth month in a row, the number of payroll employees increased, unemployment rolls continued to fall dramatically, and the unemployment rate dropped to 4.6 percent, down from 4.9 percent previously.

This is undoubtedly positive news, but not to the point where policymakers at the Bank of England will feel compelled to raise interest rates. If, on the other hand, economic activity improves and the Delta variant of Covid is brought under control, the BoE’s wait-and-see strategy may have to be reconsidered.

The CPI in August in the United Kingdom increased by 3.2 percent year on year, reaching its highest level since March 2012. The stronger-than-expected figures boosted the pound, which is currently gaining versus most of its G10 counterparts.

The latest UK inflation numbers highlight the rise in inflationary pressures that can be seen across developed countries, raising concerns that central banks will have to back off the accelerator sooner rather than later. With markets currently putting in an 82 percent possibility of a BoE rate hike in May 2022, sterling should benefit from a more favorable environment. In its drive to normalize policy settings, the BoE is further along than other major central banks, and all eyes are now on the MPC meeting next week.

UK Inflation Rises, the Pound Remains Stable

On Wednesday, the British pound reversed course and is now in positive territory. The GBP/USD exchange rate is currently at 1.3823, up 0.15 percent for the day. The GBP/USD pair drew some buying on Wednesday after displaying some resiliency below the 1.3800 round figure, halting the previous day’s strong fall from the highest level since August 8.

The British pound was supported by higher-than-expected consumer inflation numbers in the United Kingdom. This, combined with ongoing US dollar weakness, gave the major an extra lift. Instead of capitalizing on the previous day’s late rebound from post-US CPI swing lows, the USD was faced with additional supply amid lower odds of an early Fed tapering move.

A softer tone around US Treasury bond yields, combined with the underlying positive sentiment, undercut deflationary pressures. This was reflected in a softer tone around US Treasury bond yields, which, combined with the underlying optimistic sentiment, weakened demand for the safe-haven dollar.