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Strong Domestic Inflation and Weak US Inflation Drive the GBP Rally

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August 17, 2016 By: , No Comments

Traders Pounce on Positive UK Inflation Data Driving the Sterling Towards 1.30

 

The GBP/USD currency pair is presently trading at 1.2983, up 0.79% or 0.0103. For the year-to-date, the currency pair is trading 11.92% lower, after starting at 1.4737 in January and plunging to a 31-year low in the post-Brexit period. Over the past 5 trading days, the GBP/USD currency pair has depreciated by just 0.17%, buoyed in large measure by weak economic data from the US and concomitant strong data from the UK. In the past 1 day, the GBP/USD currency pair has appreciated by 0.79%, largely thanks to a 0.6% uptick in consumer prices in July.

 
British Pound

 

Sharp Increases in Consumer Prices Bode Well for UK Economy

 

In the months following the historic June 23 Brexit vote, consumer prices rose by 0.6% year-on-year in July. The increase during June 2016 was 0.5% year-on-year. This marks the strongest uptick in UK inflation since November 2014. The biggest drivers of increased inflation in the UK include hotel and restaurant, transportation and alcohol. The consensus forecast for inflation in July was 0.5% and the actual figure came in 0.1% higher, leading to a bull run with the sterling.

 
For September 13, 2016, with the reference month being August, the forecast inflation rate is 0.6%. Inflation gained its biggest boost from increased transportation costs which rose by 0.2%. This was the first time this happened in almost 2 years. Other notable increases over June include culture and recreation +0.8%. Restaurants and hotels were major drivers of increased prices in the UK with gains of 2.3% over June. The ‘sin products’ – alcohol beverages and tobacco were up 1.8% and 0.5% over June. Healthcare costs also increased by 2.7% over their June figures.

 

How Spread Bettors are Profiting Off the Data

 

Since this is the quickest rate of increase in UK inflation in 21 months, there is plenty of optimism about prospects for the UK economy. While it is still too soon to tell, it appears as if purchasing behaviour, and economic activity have not been adversely affected in the month after the Brexit decision was announced. Consumer prices are for all intents and purposes are rising as they should be and the stimulus measures adopted by the Bank of England and its Monetary Policy Committee should help to drive CPI data.

 

The GBP/USD currency pair gained approximately 1%, as it clawed its way back towards 1.30, but its performance against the EUR was less notable. The GBP/EUR pair reached 3-year low, but it is likely that the sterling can regain some ground and move towards the 1.15 level. For the all-important FTSE 100 index, gains were muted, with no appreciable increase or decrease on the day. By the close of the trading session on Tuesday, 16 August 2016 the FTSE 100 index was down 0.38% or 26.57 points at 6,914.62.

 
Equally important is the impact of US economic data on the GBP/USD currency pair. The latest inflation rate for July in the US was 0.8%. The year-on-year growth figure is below market expectations of 0.9%. It also marks the worst performance in terms of inflation in the US since December 2015. The slow rate of growth in CPI data was largely due to lower food costs and energy costs. Nonetheless, this data worked in tandem with strong UK data to drive long positions on the GBP/USD pair.

 
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Brett Chatz

About Brett Chatz

Brett Chatz is a graduate of the University of South Africa, and holds a Bachelor of Commerce degree, with Economics and Strategic management as his major subjects. Nowadays Brett contributes from his vast expertise in online trading for spreadbettingreview.co.uk.

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