The gains of the currency pair's upside, reaching the 1.4220 resistance level, were near its highest level in 2021. The currency pair is stabilizing around 1.4115 at the start of trading on Thursday. The Sterling ignored the rise in UK inflation by a larger margin than analysts had expected, but the rally was by no means surprising enough to warrant a major reconsideration of how the Bank of England might change its views on interest rates.
According to official figures, the UK CPI rose 0.6% month over month in April, which is in line with market expectations but doubled the March reading to 0.3%. April CPI inflation rose 1.5% year-on-year according to ONS, a sign above the 1.4% the market had been expecting and more than double the 0.7% reading recorded in March. The sharp rise in inflation is understandable given that this month's data is compared to the sharp drop recorded one year ago, at a time when the global economy has been slowing sharply in the face of the Covid-19 attack
This phenomenon is known as the "primary effect".
The Office for National Statistics also stated that rising commodity-based costs are contributing to price pressures, a view already embraced by Bank of England Governor Andrew Bailey. Bailey told the Lords Economic Affairs Committee on Tuesday 19 May that he is currently optimistic about the possibility of a price increase in the near term, considering it likely to be temporary as higher fuel costs are expected. Even so, the British pound weakened in the wake of the direct issuance, indicating that the market was likely to be concerned about an explosion of inflation seen in the US earlier this month, an outcome that was likely to force Pelly to rethink. .
Ruth Gregory, chief economist at UK Capital Economics says, “The jump in CPI inflation from 0.7% in March to 1.5% in April was almost entirely driven by the energy price effects, which will only be temporary. We suspect a sustained increase in UK inflation which would worry the BoE until late. 2023 ”.
As we mentioned before, inflation data is starting to concern the pound sterling exchange rates again and the market will be wary of strong inflation expectations hitting the consensus that would send the British currency sharply higher. However, as the data is somewhat on target, there may be some disappointment among the GBP bulls and it is ultimately unlikely that the data will provide any major shift in the direction of the currency.
The Office for National Statistics says price movements of household utilities, clothes and auto fuel are the main reasons for the increase in the monthly rate this year compared to last year. Petroleum products witnessed the highest annual growth rate for any component of production prices in April 2021, at 50.3%. The rise in the front yard prices comes amid a continuous rise in global oil prices as demand rises in response to global economic activity.
This is the type of inflation that the BoE realizes that it cannot do much about it and is therefore unlikely to have an impact on domestic monetary policy, and thus on the Sterling. Given this “base effect”, it should be noted that the component of the fuel price for this month has always been large as petroleum product prices fell in April 2020 by 23.5%, as there was a significant drop in demand in the market.
According to the technical analysis of the pair: The current upward trend of the British pound against the US dollar GBP / USD may face the risk of evaporation in the event that the bears succeed in breaking below the support level 1.4000, which may increase the selling operations and thus threaten the current bullish outlook. As I mentioned before, skirmishes between the two sides of Brexit and fears of a new corona virus in Britain, along with fears of an outbreak of the Indian strain threatening Boris Johnson's plans to reopen the country's economic activity. On the upside, the bulls will need to move above the resistance 1.4220 again to strengthen the upside and move towards stronger ascending levels. Currently the best selling currency pair is from every upward level.
Regarding today's economic calendar data: Today's economic calendar is devoid of important UK data. The focus will be on US data weekly jobless claims and the Philadelphia industrial index reading.
