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After the Brexit referendum in the United Kingdom, sterling suffered a devaluation against its major trading counterparts and as a result of that, in July, inflation reading surprised to the upside. After the initial calm, the volatility returned to sterling in October and the exchange rate hit as low as 1.1841 against the dollar. With renewed decline in the sterling, there could be a further uptick in inflation.
As of now, the Bank of England (BoE), which introduced a massive easing package in August, is fully committed to easing but a sharp upturn in inflation might cloud the outlook for further monetary easing.
So, the focus will now stay on the next set of data. The inflation figures for the month of October will be reported at 9:30 GMT, today.
- The Retail price index, in July, surprised to the upside and shot up to 1.9 percent. In September, it reached 2 percent and in October it is expected to rise further to 2.2 percent.
- The biggest rise was seen in the producer price index, that grew by 4.3 percent in July compared to a negative 0.5 percent in June and in September it moderated to 7.2 percent but expected to shoot up in October to 9.2 percent y/y. Last month producer price index for output didn’t grow much compared to the input; it was up by only 0.3 percent. Today it is expected to grow by 1.1 percent. We believe that the impact could be bigger than expected this time around.
- Another focus point would be the house price index and the bear traders would be looking for weakness here, but if the data surprises on the positive side then that’s great news. It is expected to grow by 8.1 percent y/y in October.
- Finally the CPI reading, this shot up to 0.6 percent in July and moved up to 1 percent in September. A surprise here would be the biggest mover in the sterling.
Since it is expected that the BoE would continue to ease even if inflation shoots up, above the target, at least in the near term; it is not clear how the sterling might react to the data. The pound is currently trading at 1.248 against the dollar, down as the resistance zone near 1.275 weighs.
