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Sterling Loses Gains Following Soft Inflation Data

David Becker
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The GBPUSD dropped as inflation data reported on Tuesday unexpected came in worse than forecast. The news was in sharp contrast with recent hawkish tone of many BoE members. Even dovish BoE member such as Miles have now turned hawkish discussing the rate of increase in economic growth relative to expectations. Sterling was poised to breakout but has now moved back into its long-term range.

May CPI unexpectedly fell to 1.5% year over year, which is a new-cycle low having dropped from 1.8% in April, surpassing March’s 1.6% year over year. May PPI figures were also below expectations, with input prices down 5.0% year over year and output prices ebbing to 0.5% year over year from 1.1% in April.

Recent average household incomes data also remained very subdued suggesting that the scope for domestically generated price pressures remains muted. The data suggest that the BoE has time on its hands before hiking, especially as the central bank has the option of utilising new powers to curtail mortgage lending as a means of reining in house price inflation.

MPC member Miles turns hawkish, remarking in an interview with The Times that “consistently, growth has come in stronger” than expected, and that he would likely vote for a rate hike before his term ends in 11 months’ time. This follows BoE governor Carney who last week said that a rate rise “… could happen sooner than markets currently expect,” and weekend remarks by deputy governor Bean, who said that he would “welcome” the first rate hike. Given that Miles is one of the more dovish MPC members, traders can expect a good portion of the other six Committee members are turning hawkish too, though a majority vote in favor of a hike is not likely until late this year at the earliest.

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