UK CPI Lifts British Pound

Alan Penny

19 February 2020

3 min read

  • Consumer Price Index surprises to the upside
  • Producers Price Index also welcoming
  • Both figures better than expected

Early during the trading session on Wednesday, the UK released the Consumer Price Index figures year-over-year, along with Core CPI, Producers Price Index Input figures, and Producers Price Index Output figures. With a major release like that, paying attention to the currency makes the most sense.

The announcements came in strong

The Producers Price Index Input month-over-month figures came out at 0.9%, which was much bigger than the -0.5% expected. Furthermore, the number from the previous month was revised upward from 0.1% to a reading of 0.9%, which was far better than expected.

Up next, the Producers Price Index Output month-over-month figures came out at 0.3% – better than the anticipated 0.1% for the announcement. The Core Consumer Price Index figure, one of the major inputs for inflation, came out at 1.6% year-over-year. The Consumer Price Index year-over-year figures came out at 1.8%, much better than 1.6% as anticipated.

inflationary figures, driving up the expectations for the Bank of England to remain neutral as far as interest rates are concerned

In other words, the figures coming out of the United Kingdom were much better than anticipated. All of these numbers are inflationary figures, driving up the expectations for the Bank of England to remain neutral as far as interest rates are concerned, or perhaps even raise interest rates over the longer term.

Ultimately, the central banks around the world are very loose with monetary policy, but if the United Kingdom is showing signs of much better than anticipated strength, that could put the British pound in the driver seat.

Technical analysis on the GBP/AUD

GBP/AUD chart

While the British pound is typically measured against the US dollar, taking a look at the sterling against other currencies certainly gives you a better overall picture of what is going on. After all, the US economy is head and shoulders above all of the others. However, when you take a look at the British pound against some of the other economies that have known issues, you get a clearer picture of potential strength.

The GBP/AUD pair has been rallying towards the 1.95 level for some time. The market does look as if it is going to try to break through that level again and go looking towards the 2.00 level, as Australia has a massive amount of issues, considering it is so highly levered to the Chinese economy.

As a result, the British pound may be rapidly taking “second-place” when it comes to desirability with currencies. If the United Kingdom continues to grow the way it has, then it will also have strength going into the negotiations against the European Union.

This could result in a potential “one-two punch” of Boris Johnson and his counterpart Donald Trump coming together for a free-trade agreement, something that most Americans would support.

The British pound is very likely to go higher against most currencies, although admittedly, the US dollar will be pretty tough to break above.

Written By
Alan Penny

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