Pound trims CPI related gains

The pound staged a small rally after this morning’s publication of the latest UK inflation figures, before giving back a sizeable chunk of its gains against the dollar. It actually turned negative against the euro and yen, though it was holding its own better against commodity currencies. The ONS reported that UK CPI remained unchanged at 3% in January. This surprised some analysts who we relooking for a small moderation in prices.

Other measures of inflation were mixed with core CPI also surprising at 2.7%, while the RPI unexpectedly fell to 4.0% form 4.1% previously. But overall inflation rose more than expected, and the pound’s initial response was a swift rally. However sterling came off its best levels around midday as traders who bought the news, took profit.

It is worth noting that the Bank of England will probably not be surprised by the outcome of today’s inflation figures after it predicted that CPI will remain elevated and that it intends to combat this by raising interest rates earlier and faster than previously expected. But is the BoE correct in its projections? Can they be trusted? While inflation could easily rise further, one has to consider the alternative scenario too.

After all, the impact of sterling’s post declines has fallen away. What’s more, crude oil prices have been falling of late, with both Brent and WTI recently turning negative on the year. If oil prices fall further then this may be reflected in lower fuel and energy prices, and hopefully lower inflation. Given the ongoing Brexit uncertainty, the BoE would favour not having to hike rates if inflation were to fall back. So, an imminent rate hike is not a done deal by any means.

Still, the BoE has definitely dropped its dovish bias and the next change in interest rates will most likely be a raise than a cut. So, there is a possibility we may see the pound drift higher in the coming months. If sterling were to shine, its best bet would be against a non-US dollar currency, as the greenback has been on a good run of form against most currencies of late.

GBP/AUD could head above 1.80

The pound was performing well against the likes of the Aussie given the recent sharp drop in commodity currencies. So, the British pound/Australian dollar (GBP/AUD) currency pair is our featured chart today. From a technical perspective, the GBP/AUD could be on the verge of resuming its upward trend after its recent pullback from the key 1.80 psychological resistance level has worked off overbought conditions. More to the point, I think last week’s bearish-looking price candle may be a false alarm for the bulls as the price is currently refusing to hold below the low at 1.7610/12. If that is the case, the short-term bias would turn bullish in the event the GBP/AUD forms a base above last week’s closing price of 1.7685.

Consequently, we may see the bears abandon their positions, accelerating the potential rally back towards, and this time possibly above, 1.8000. But first thing is first: we need to see the formation of a bullish daily candle here on a closing basis. Alternatively, if the GBP/AUD gives up today’s gains and goes below last week’s low then, in that case, we could see a deeper retracement in the coming days, before price potential forms a base.