Higher-than-expected inflation numbers helped the Pound to rally against the Dollar, as markets are betting that the Bank of England will have no choice but to pursue further interest rate hikes. After the figures were announced, the price of the GBP/USD currency pair rose to the resistance level of 1.3298 before quickly returning to the 1.3175 support area, which confirms our technical view that the US dollar will remain the strongest if the Russian war lasts.
According to official figures, the UK consumer price index inflation rose 6.2% on an annual basis in February. This is according to the country’s highest national statistics office in 30 years, which was more than the 5.9% increase that markets had been expecting and a marked increase from the percentage of 5.5% recorded in January. Inflation rose 0.8% month over month in February, topping expectations for a 0.6% rise and above January’s 0.1% reading.
Core inflation, which aims to exclude external inflationary forces – rose by 5.2% in February, ahead of the 5.0% market expected and January’s reading of 4.4%. Prices rose sharply in February as prices for a range of goods and services rose, from products as diverse as food to toys. Experts say advanced markets and economies continue to digest soaring inflation along with the uncertainty surrounding Russia’s war on Ukraine. Mapping of past events has been a popular system, but the truth is that no investor has gone through these specific circumstances. Given this sensitive market environment, investors will need to monitor data and markets closely and customize accordingly. Diversification, active management, and prudence will be key.
The numbers are in line with expectations for a rate hike in the Bank of England in the coming months, providing a mechanical support for the British Pound. Overall, this week markets raised expectations about the number of Bank of England rate hikes that are likely to fall in 2022, boosting the value of the pound in the process.
Money markets on Monday showed that investors expect interest rates to rise by 111 points from the Bank of England in 2022, this rose to 130 points as of Tuesday and by Wednesday it was at 138. During this period, the pound rose against the dollar, the euro, and most currencies. The Group of Ten, which confirms the importance of the expectations of raising interest rates on the currency. If this trend continues, the pound could rally, but the obvious risk to the pound “bulls” at this juncture is that expectations have been squeezed backwards.
Economists warn that inflationary pressures are likely to rise further, adding more pressure on the Bank of England to raise interest rates. Last week, the Bank of England raised interest rates for the third time to 0.75% to combat soaring inflation, which is now expected to reach 8% later this spring. Many are already feeling the financial stress, but there is no doubt that it is much worse that comes considering that we are facing a major cost-of-living crisis along with other financial stresses.
Paul Dales, chief UK economist at Capital Economics, notes that much of the rally was due to unfavorable fundamental effects as the Covid-19 shutdown in early 2021 meant price changes were weak a year ago. He added that increases in clothing inflation from 6.3% to 8.9% are at least partly due to weak price changes a year ago rather than unusually large increases in February.
Capital Economics identified “real price hikes” in February that increased food and drink prices from 4.3% to 5.1%, “and we believe they will soon rise above 6%.” The increased pressure on consumers will be the biggest jump in fuel prices ever, which is expected to fall in March. Capital Economics expects CPI inflation to peak at 8.3% in April, but risks to this number are on the upside.
According to the technical analysis of the pair: With the recent bullish trading sessions of the GBP/USD currency pair, the pair is still at the beginning of forming an ascending channel that reflects the downward trend, which the Russian war caused to push it to the psychological support level 1.3000. On the upside, and according to the performance on the daily chart, breaking the resistance 1.3335 will be important for the bulls to continue controlling the trend.
The currency pair will be affected today by the extent to which investors take risks or not, as well as the reaction from the announcement of the manufacturing and services PMI readings in Britain and then the announcement of US durable goods orders and weekly jobless claims.