Key data on inflation growth in the UK was released on Wednesday, September 15. Taking into account the recently announced position of the English regulator, this release naturally provoked increased volatility in the GBP/USD pair. Despite the rather strong forecasts, the report turned out to be better than expected as almost all components entered the green zone.
The general consumer price index in August came out at the level of 0.7% MoM, thereby updating the annual maximum. The indicator also showed an abrupt growth, reaching 3.2% YoY. This is a long-term record: the indicator showed the strongest growth rate since May 2012. Core inflation showed a similar trend, the core consumer price index jumped to 3.1%, which was also a multi-year record. The producer price index was also published on the same day (strong growth was recorded both in monthly and annual terms), as well as the producer purchase price index (the indicator also reflected a positive trend).
British inflation surprised us with its breakout growth. This fact brought the question of rate hikes back to the agenda. Let me remind you that, according to a number of experts, the Bank of England may even "overtake" the Fed in this matter, which, as a rule, is at the forefront of such events. Experts interviewed by Reuters said that the English regulator will decide to raise the interest rate as early as next year (some of them even allowed a double increase in 2022). At that time, the Fed is likely to start tightening monetary policy only in early 2023. Such assumptions were indirectly confirmed by Bank of England Governor Andrew Bailey. Bailey has recently announced that at its August meeting, the Committee was evenly divided over whether the minimum conditions for a rate hike were met. Only the Reserve Bank of New Zealand, which at the last meeting planned to increase the interest rate (prevented by the coronavirus, which again came to the island state), can boast of such a "hawkish" attitude. According to currency strategists at Morgan Stanley, the Bank of England is "one of the most aggressive central banks among the central banks of the leading countries of the world."
Such a reputation theoretically allows buyers of the GBP/USD pair to go straight to the upside, sweeping away everything in their path, especially against the backdrop of weak nonfarm payrolls reports and inexpressive US inflation. But the pair's bulls were only able to move away from the August lows (1.3600) and consolidate within the 38th figure. You might agree that this reaction of traders is disproportionate, given the growth of key macroeconomic indicators in Britain and the pronounced "hawkish" hints from the Bank of England. Buyers of GBP/USD are cautious, not even daring to test the 39th figure, which conquest will open the way to the "valley of the forties".
In my opinion, such caution is due to the "coronavirus factor" and political factors, primarily the Scottish issue. Last week, Prime Minister Nicola Sturgeon confirmed at a Scottish National Party conference that she plans to hold a plebiscite by the end of 2023 and that those plans, paused by the pandemic, are "unchanged." According to experts, Scotland is divided 50/50 in terms of independence. But at the same time, analysts do not exclude the possibility that many politically neutral residents of Scotland can, if necessary, mobilize and use the chance they have. Therefore, the sociological picture may change significantly, when the hypothetical plans for holding a new referendum acquire real features.
The "coronavirus factor" also exerts background pressure on the pound. On Tuesday, September 14, the UK government announced that they had developed a so-called "plan B" to combat COVID-19 in the upcoming winter period. This plan will be applied if the number of hospitalized patients and the number of deaths in the country increases. In this case, the authorities plan to return such restrictions as wearing masks, working from home, the introduction of mandatory vaccine certificates for nightclubs, premises with more than 500 visitors, and restrictions on visitors in gyms and stadiums. In other words, the service sector will be under attack again.
Meanwhile, there are also some nuances on the record growth in inflation in Britain. The fact is that last year the country had a stimulating program "Eat Out to Help Out", which "lured" citizens to restaurants, cafes, and pubs. The authorities wanted to help the affected catering sector, so they "paid" for a substantial discount, up to 50%. As a result, prices for food in cafeterias and restaurants have dropped significantly. This program was in effect for a short time, prices increased this year, but the gap with last year's low prices was significant. The structure of today's release suggests that the rise in prices in cafes, pubs, and restaurants accounted for the lion's share of the rise in the CPI on an annualized basis. However, there is also a downside to the coin: in the following months, the influence factor of the "Eat Out to Help Out" program will not work, since its operation ended on August 31, 2020.
Such a contradictory fundamental background suggests that buyers of the GBP/USD pair still have a "power reserve" to the main resistance level of 1.3900 (the upper line of the Bollinger Bands indicator, which coincides with the upper border of the Kumo cloud on D1). Due to the inertia of the inflation report, as well as against the background of "hawkish rants" of some members of the Bank of England, the pound may test the above target in the medium term. If the GBP/USD bulls failed to consolidate in the area of the 39th figure (judging by the previous southern pullbacks, this is the most likely option), the priority will again be short positions with the main target of 1.3770 (the middle line of the Bollinger Bands on the same timeframe).
