U.K. Inflation As Expected, Sterling Under Crowded Selling

The U.K.'s Office for National Statistics earlier released the Consumer Price Index for last month.  According to the statement, month-on-month, the CPI fell to 0.1%, matching the forecasts by a consensus of analysts, and well off last month's 1% rise.  As compared to the same period a year ago, however, data shows that the CPI rose to 4% from January 2009 3.7%, slightly off analysts' forecast of 4.1%.  Using the CPI as a gauge of inflation, at 4.0%, the inflation rate is now double the Bank of England's 2% target, and is now the highest it's been in more than two years.

The data calls into question the Bank of England's commitment to keep interest rates at their historically low .5%.  Their concern is that raising interest rates now could further jeopardize their already fragile economy, and make full recovery even more difficult to achieve.  The U.K. central bank has been relying on the argument that one-off fundamentals were driving inflation.  One of those "one-off" includes a hike in the Value Added Tax, which went into effect on January 4th.  One economist concurs that the January CPI figures are "tricky" and may in fact have been affected by the recently implemented tax changes.

Nonetheless, this recent data calls the Bank of England's assertion and commitment into question.  Growing pressure on prices are leading investors to the inexorable conclusion that the central bank may have no choice but to consider a rate increase, at a minimum of 25 basis points, as soon as May.

While some market players said that the expected inflationary pressures were already factored into market prices, the Pound Sterling slipped broadly, nonetheless.  Currently, the Pound Sterling is trending lower against major currencies, and trading against the U.S. Dollar at 1.6020; on the eToro trading floor, among traders of GBP/USD the sentiment is bullish with a ratio of 6 to 5 in favor of selling.  The Pound is also lower against the Euro; EUR/GBP is at .8438 and on the eToro trading floor, the sentiment is bullish with a ratio of 2 to 4 in favor of selling.  Against the Japanese Yen, the Pound Sterling is 133.9241; on the eToro trading floor, among traders of GBP/JPY the sentiment is bullish with a ratio of 3 to 2 in favor of buying.

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