Trading forex – UK inflation preview

Volatility in sterling currency crosses is expected to be higher on Tuesday with UK inflation data due out at 09:30 (GMT). The collapse in the value of sterling and rising oil prices has seen inflation accelerate in recent months and analysts think this trend will continue.

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Last month’s publication showed CPI rose by 1.6% in the year to December 2016, versus a 1.2% rise in the year to November. The annual rate was the highest since July 2014, when it was also 1.6%.

For January, the headline CPI rate is expected to rise to 1.9%, within a whisker of the Bank of England’s 2% target.

Why it matters

Inflation is driving a slightly more hawkish outlook from the Bank of England. The faster inflation rises the closer the central bank gets to raising rates from their historic lows.

Governor Mark Carney has stressed that there are “limits to the extent an inflation overshoot can be tolerated”.

Outgoing MPC member Kristin Forbes suggested she is close to voting for a rate hike to combat the threat of spiralling inflation, which is about to break through the Bank’s 2% target.

However, at its last meeting the BoE’s Monetary Policy Committee left rates on hold and struck a tone that indicated it is reluctant to increase rates any time soon.

The MPC noted how monetary policy is not enough to combat the real adjustment required for new trading arrangements. The bank noted that “attempting to offset fully the effect of weaker sterling on inflation would be achievable only at the cost of higher unemployment and, in all likelihood, even weaker income growth”. As discussed at the time, this looks like a major barrier to rates being hiked.

Trading opportunity: GBPUSD

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The pound has been stuck in a fairly steady range since the flash crash of October. Escaping this on the upside would require a fairly hefty inflation beat – say something in excess of 2%. Input prices for businesses – a useful leading indicator of CPI inflation – have risen sharply in recent month, which suggests there is a chance that inflation will overshoot.

When is UK inflation data released?

UK CPI, RPI, PPI and HPI inflation figures are released by the Office for National Statistics at 09:30 (GMT), February 14th.