Shop prices pause keeps cap on sterling for now

Questioning of Bank of England Governor Carney and other UK rate setters by The Treasury Committee largely covered ground which, from a markets point of view, was already well trodden.

Whilst broadly interesting, the discussion did nothing to negate bearish perceptions of the U.K.’s latest inflation update which saw a widening divergence between consumer and factory prices.

Sterling’s extension of the down leg that commenced on Monday (cable traded down 77 pips and verged on $1.24 at the time of writing) was largely a reaction to softer than expected CPI.

The headline +0.9% year-to-year print, when +1.1% was forecast is being read as tilt towards the more dovish view of the inflationary outlook among the BoE’s MPC.

As ever, we need to remember that one counter-trend reading is of only marginal importance in itself.

Nevertheless, the extension of the pound’s softer performance this week is rational in view of the rapid snap-back in implied probability of a Federal Reserve rate rise by 25 basis points and slightly reduced odds for anti-inflationary U.K. tightening.

As for the figures themselves, on the consumer side, continued artefacts from the summer’s economic and political mayhem can’t be ruled out.

However, stronger than forecast producer prices can’t be downplayed in the same way, with such eye-catching records as October’s 12.2% input price acceleration, the biggest annual increase since 2011.

The tone of questions at the Inflation Hearings, if not their content, was charged with commensurate anxiety, partly to do with the uncontrolled influx of inflation itself.

The rate of factory gate price rises underlines how difficult it is to predict when retailers and stockists will have to release the lid on wholesale price pressure and, in turn, what the consumer impact and reaction will be.

Eventually, price rises will inevitably be bullish for the pound, but Tuesday’s inflation snapshot confirms ambivalence and uncertainty in the outlook for prices, even if the lag is keeping a cap on sterling, for now.

• From a technical point of view, our hope that sterling against the dollar would break out of the short-term descending flag in effect since the end of last week has turned out to be misplaced for now
• So long as cable continues within the sharply descending range, in all probability, GBP/USD will be on course for another visit to early November support zone $1.2349-$1.2373
• We assume the chances of support holding improve or deteriorate depending on how long the rate remains in the declining range mentioned above
• Early warning that cable’s down leg is deepening well be found beyond Tuesday’s $1.2388 low and, subsequently, approach to lows on the day after the U.S. election ($1.2365-$1.2367)

HOURLY CHART: GBP/USD

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