British Inflation Exceeds Expectations

UK inflation rose again this month to its highest in thirty years, confirming the likely prospect of a Bank of England rate hike in February and doing nothing much for the British pound.

January 2022 UK CPI Data Release

Earlier today saw the release of monthly UK CPI (inflation) data showing the extent to which the price of a representative basket of goods and services is rising. The data showed that year on year, inflation rose by 5.4%, higher than the 5.2% which was the consensus forecast. The increase in prices was narrower than it was last month, and the UK is seeing the strongest price rises in housing, clothes, food, and furniture. The increase was driven primarily by a surging cost of goods by 6.9% while services increased by only 3.1%.

It is therefore clear that inflation rose by slightly more than was expected. The annualised inflation rate of 5.4% is the highest rate recorded since 1992, and the Bank of England expects it to reach 6% by April 2022. However, it is worth noting that UK inflation remains markedly lower in both absolute and historic terms than seen in the US right now, where inflation is running at an annualized rate of 7.0%.

Market Reaction to UK CPI Data

The release was made just before the start of Wednesday’s London session, so at the time of writing, markets have had about eight hours to react. The British pound has risen in value against almost all other currencies. The GBP/USD currency pair is up by 0.38%, the EUR/GBP currency cross is down by 0.20%, and the GBP/JPY currency cross is up by 0.21%. The major British stock market index, the FTSE 100, has risen by 0.90%.

These price movements are not large by any means, the rise in the relative value of the pound is nothing out of the ordinary so it is important not to draw any conclusions beyond the market had today’s increase already “priced in”.

What Does This Mean for Traders?

Traders can consider taking a more bearish bias on the British pound over the short term. This could be expressed by looking to day trade GBP/USD in a short direction today, as the price remains about 20 pips off its average true range and clearly failed to hold up above the key resistance level at $1.3646.

On a more cautionary note, it should be noted that the price movement we are seeing the British pound right now is far from exceptional.

Adam Lemon

Adam Lemon began his role at DailyForex in 2013 when he was brought in as an in-house Chief Analyst. Adam trades Forex, stocks and other instruments in his own account. Adam believes that it is very possible for retail traders/investors to secure a positive return over time provided they limit their risks, follow trends, and persevere through short-term losing streaks – provided only reputable brokerages are used. He has previously worked within financial markets over a 12-year period, including 6 years with Merrill Lynch.