GBP/USD rises as surging inflation puts pressure on the BOE

By: Crispus Nyaga
Crispus Nyaga
Crispus is an active trader, where he is followed and copied at Capital.com. He lives in Nairobi with his… read more.
on Jun 16, 2021
  • The GBP/USD pair rose on Wednesday after the latest UK inflation data.
  • The headline consumer price index rose by 2% in May.
  • This increase is putting more pressure on the Bank of England (BOE).

The GBP/USD pair popped on Wednesday after the latest UK inflation data. The pair rose to 1.4110, which was substantially higher than this week’s low of 1.4033. 

GBP/USD
GBP/USD price action

UK inflation rises

Consumer prices are rising around the world as the economy recovers and commodity prices rise. This trend continued in the UK. 

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According to the Office of National Statistics (ONS), the headline consumer price index (CPI) rose by 0.6% in May, better than the expected slowdown of 0.3%. This increase led to a year-on-year increase of 2.1% after rising by 1.5% in the previous month. This increase was above the Bank of England’s (BOE) target of 2% and the median estimate of 1.8%.

The core CPI, which excludes the volatile food and energy prices, rose from 0.3% to 0.8% on a month-on-month basis and from 1.3% to 2.0% on an annualised basis. This increase was mostly because of a sharp increase of clothing, motor fuel, and recreational goods prices. It as partially offset by falling food and non-alcoholic prices.

The GBP/USD also rose after the release of factory-gate prices. The PPI input increased from 10% to 10.7% while PI output rose from 4.0% to 4.6%. As such, these numbers show that there is a sizablegap between producer and consumer prices.

The data came a day after the UK published strong unemployment numbers. The unemployment rate declined from 4.8% in March to 4.7% in April. Therefore, these numbers point to possible tightening by the Bank of England (BOE) when it meets next week. In a note, analysts at ING wrote:

“For the time being, we’re still penciling in the first rate hike in early 2023. However a more rapid economic recovery – perhaps triggered by greater-than-expected unloading of household savings – could conceivably bring that forward in 2022”

The GBP/USD will later today react to the latest Federal Reserve interest rate decision that will come out later today. Analysts expect the Fed will leave rates unchanged and maintain a hawkish tone.

GBP/USD analysis

GBP/USD
GBP/USD technical chart

The four-hour chart shows that the GBP/USD pair jumped after the latest UK inflation data. The pair has moved above the important resistance at 1.4084 and crossed the 25-day exponential moving averages (EMA). At the same time, the Relative Strength Index (RSI) has formed a falling channel that is shown in blue. This is a sign of a bearish divergence. Therefore, the pair may resume the downward trend as bears target the next key support at 1.4000.

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