Sun

Mr. SUN Yu (Elic) VP Client Relations China - Manages Chinese business relations for the brand. Elic provides market commentary for well-known media in China, including: People.cn, Financial News and China Finance Information Network. Elic serves as a special guest analyst on the CCTV Financial Channel to provide real-time analysis on the foreign exchange market.

The British pound gathered momentum on Tuesday after government data showed bigger than expected gains in the consumer price index, CPI, adding to the view that inflation will continue to overshoot the official Bank of England (BOE) target for the foreseeable future.

The CPI rose 2.9% in the 12 months through May, the highest in nearly four years, the Office for National Statistics (ONS) reported Tuesday from London. That was higher than April’s 2.7% annualized rate and above forecasts calling for the same.

So-called core inflation, which strips away volatile items such as food and energy, rose 2.6% annually in May. That was higher than the previous month’s 2.4% increase.

Retail inflation also surged last month, with the retail price index gaining 3.7% on year.

Meanwhile, output producer prices rose 3.6% year-over-year, unchanged from the previous month.

A pick up in inflation will likely squeeze cash-strapped consumers already subject to higher import costs.[1] The value of imports has increased sharply since last summer’s Brexit vote, as the pound fell to 30-year lows against the dollar.

Brexit-related risks intensified last week after the Conservative government failed to secure a majority mandate in an election many pundits viewed as unnecessary. This forced Prime Minister Theresa May to form a coalition government with Northern Ireland’s Democratic Unionist Party.

Higher inflation puts pressure on the BOE to better manage the rising cost of living. However, several economists suggest that policymakers will ‘look through’ the inflation figures as they focus on other macroeconomic objectives.[2] This means interest rates are unlikely to go up anytime soon.

The British pound, as expressed by the GBP/USD exchange rate, shot up to 1.2765 on Tuesday before paring gains slightly. That followed a sharp drop at the hands of the 8 June parliamentary election. The move higher pushed the pound above the 38.2% Fibonacci retracement of the mid-May increase, putting cable on track for a re-test of the 23.6% Fibonacci at 1.2825.[3] However, a leading analyst at Commerzbank has preserved a negative short-term outlook on the pound, citing a variety of technical bottlenecks.[4]

In equities, the U.K.’s FTSE 100 was the only national bourse to finish lower on Tuesday. The benchmark fell 0.2% for its second straight decline. The FTSE’s last record high occurred on 26 May, where it closed at 7,547.63. The benchmark gauge settled at the exact same level on 2 June.

 

[1] BBC News (13 June 2017). “UK inflation rate at near four-year high.”

[2] Graeme Wearden (13 June 2017). “Government urged to act on wage squeeze as UK inflation rate hits 2.9% – as it happened.” The Guardian.

[3]  Eren Sengezer (13 June 2017). “GBP/USD preserves post-CPI gains above 1.27.” FXStreet.

[4] Pablo Piovano (13 June 20170. “GBP/USD negative near-term – Commerzbank.” FXStreet.

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