Pound makes surprise gains following a rise in UK inflation

19 October, 2016

Matthew Boyle

Yesterday’s data releases were largely dominated by news in the morning that UK inflation had risen to 1% in September, up from 0.6% in August and largely driven by an increase in demand for hotel rooms, petrol and clothes. Initially the market reacted fairly slowly to this news, however by the end of the day, trading the Pound had gained almost a cent against the Euro and around ¾ of a cent against the US Dollar – one of the best daily performances since July and taking it to the highest rates we have seen against both for nearly 3 weeks.

Whilst this in the short-term is very positive for the pound, an increase in inflation would normally trigger central banks to raise interest rates in order to curb this, strangely this high reading in the long run this may actually be bad news for the Pound and was perhaps evident in the fact that after the inflation reading the pound dropped for a short-time before gaining ground. As despite this rise in inflation the majority of market analysts point towards a further cut in the UK interest rate of 20bsps by the Bank of England on November 3rd. And this would be bad news for the Pound as in effect we would see interest rates cut, meaning less foreign investment amongst other effects on the UK economy but with a rapid increase to the cost of products and services in the UK. And so whilst we saw the Pound gain yesterday, this could be very short-lived as if rates do get cut to 0.05% we would see the Pound lose significant ground, even more so against the Dollar if the FED stay on track and raise their rates this year.

So those of you with upcoming requirements, or who have been holding off for a major recovery may like to take advantage of this spike we have seen, as the overall outlook still remains bleak for GBP in the coming months.

Today is a much quieter day on the market in the way of data releases particularly from the 3 major currencies, with UK unemployment and Eurozone construction data in the morning, and in the afternoon the US releases various housing data ecostats. Elsewhere in the world we have data from Canada also this afternoon who release their monetary policy report and statement. Those of you with any requirements for the Canadian “Loonie” or indeed any other of the many other currency pairings that Currency Index can provide, would be well advised to stay in close contact with your Currency Index account manager in what is such a volatile market and likely to be another busy day.