- UK inflation has likely risen in March back to the target.
- The BOE is still paralyzed by Brexit but will take note.
- With Brexit on break, a second consecutive positive number may already lift the pound.
The UK publishes its inflation report on Wednesday, April 17th, at 8:30 GMT. The headline Consumer Price Index (CPI) stood at 1.9% YoY in February, just below the Bank of England's 2% target. Core CPI was just 0.1% behind with 1.8%. Both figures were off the highs.
Expectations for March stand at a tick higher for both measures: CPI to 2% and Core CPI to 1.9%. The recent pickup in oil prices can explain the higher expectations for the headline, but other reasons are behind higher expectations for the core number.
The BOE would like to raise rates in order to get ahead of the curve on inflation: prevent an overheating. Moreover, wages are outpacing inflation quite significantly, with a rise of 3.5% in February reported just now.
However, Brexit paralyzes all policymaking in the UK, and this includes the central bank. The Old Lady will not budge until it receives some political clarity. Brexit also paralyzes price reaction to economic figures. The pound moved only temporarily and in a limited scope before the next Brexit-related headline rocked it.
GBP/USD reaction - upside bias
The poor reaction function has not changed in the first post-Halloween extension release. Last week's EU Summit resulted in a long delay of Brexit through the end of October. Nevertheless, the release of the jobs data on Tuesday did not trigger any substantial move. However, the lack of action can also be attributed to the lack of surprise: both wages and the unemployment rate came bang on expectations.
Will the response to inflation be different? There is a good reason to believe it will. In both the employment figures and inflation ones, expectations are for robust numbers. So, even if there are no surprises, the accumulation of upbeat figures could trigger a positive reaction in GBP/USD.
It is also important to note that markets are calm, and the US Dollar does not enjoy safe-haven flows. On this background, the bias is in favor of rises in cable.
The pound may also dismiss a small miss in the figures. It would probably take a deceleration in inflation, from 1.9% to 1.8% on the headline to send Sterling lower.
Conclusion
UK inflation is forecast to have accelerated in March. The accumulation of upbeat figures amid the Brexit calm could trigger an upside move.
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