Should you buy or sell the British pound after today’s inflation data?

on Jul 20, 2022
  • Transportation and food price increases drive inflation higher
  • UK inflation has reached a 40-year high
  • Sterling looks weak

UK inflation has hit a new 40-year high today. Coming out at 9.4% YoY, it exceeded expectations of 9.3% and kept rising from the previous 9.1%.

No one can say that the data came as a surprise. After all, the Bank of England itself warned a few months ago that UK inflation would approach double-digit territory by the year’s end.

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However, today’s data belongs to June – way earlier than the end of year level mentioned by the central bank. In any case, the ongoing rise in the prices of goods and services in the United Kingdom reflects that the cost of living crisis is deepening.

Moreover, it puts in danger the NIESR (National Institute of Economic and Social Research) target for inflation to peak at 11% by the end of 2022. If nothing changes in the next six months, inflation will likely exceed the NIESR forecast.

So, what does it mean for the British pound?

Transport contributed the most to the rise in inflation

Before looking at the implications for the British pound after today’s inflation data, it is worth considering the report’s details. Transportation contributed the most to the change in the annual inflation rate, followed by food and non-alcoholic beverages and restaurants and hotels.

Motor fuels inflation rate is a concern. It rose sharply over the last two years and will likely remain elevated given the geopolitical context.

Sterling is one of the weakest G10 currencies

The British pound, or sterling, barely reacted to the news, partly because it was expected, given the Bank of England’s warning. Nevertheless, one cannot ignore that the currency is one of the weakest in G10 countries.

A quick look at the 2022 sterling’s performance reveals that it dropped about 20 big figures against the US dollar. As a reminder, one big figure is one thousand pips points.

One may argue that it is not the GBP that is weak – it is the USD that is strong. Good point!

But how about the EUR/GBP exchange rate?

The common currency, the euro, was hurt heavily after Russia invaded Ukraine. Yet, it currently trades above the level it opened in 2022, even though the Bank of England has raised the rates several times, while the European Central Bank did not raise them at all.

Effectively, it means that today’s data is bad for the British pound. A weak currency in times of rising prices of goods and services is not attractive to investors.

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