A shift in monetary expectations following the UK inflation data will continue to provide near-term Sterling support and GBP/USD will also gain net support by default if the dollar continues to lose ground against major currencies. There is likely to be tough resistance in the 1.2500-1.2550 resistance zone, especially after the failure in this zone last month.
GBP/USD remained on the defensive in US trading on Monday with a test of support below 1.2350 as the dollar stabilised, but there was support at lower levels as the US currency was unable to extend a wider and tentative recovery.
US Chicago Fed President Evans stated that a further two rate increases were realistic over the remainder of 2017 and the monetary outlook was more favourable, but there was no response in US yields.
Overall, GBP/USD consolidated near 1.2350 before edging higher in early Europe as the Euro also gained support.
UK consumer prices rose 0.7% in February compared with expectations of a 0.5% increase and the year-on-year rate increased to 2.3% from 1.8%. This was above consensus forecasts of an increase to 2.1% and was also the highest reading since September 2013. The annual rate was also above the Bank of England’s 2% target for the first time since late 2013.
Core inflation rose to 2.0% from 1.6% previously while the RPI inflation rate increased to 3.2% from 2.6%.
The higher than expected inflation rate increased speculation that the Bank of England would be forced to tighten monetary policy more quickly than expected. This shift in expectations was fueled by last week’s policy decision where Forbes voted to increase interest rates immediately due to inflation concerns. Some other MPC members also suggested that a further increase in inflation could push them closer to recommending a rate hike sooner than expected.
Gilt prices weakened after the CPI data and UK 10-year yields rose to 1-month highs around 1.29%. Higher UK yields and a shift in interest rate expectations provided underlying Sterling support.
The latest government borrowing data was also better than expected with the lowest February borrowing requirement since 2007 which helped underpin confidence in UK fundamentals.
The UK data also served as a distraction from the on-going Brexit debate ahead of next week’s invoking of Article 50.
The Euro gained ground against the dollar with EUR/USD testing the 1.0800 area for the first time in six weeks. The Euro gained support following the first TV debate for the French Presidential election with National Front leader Le Pen not seen as gaining any additional support while centrist Macron was seen as the most credible candidate by one poll.
The firmer Euro tone also helped underpin GBP/USD as the US currency remained on the defensive with the dollar’s trade-weighted index declining to six-week lows below 99.70.