Ever-since global financial crisis, major central bankers have been pursuing ultra-eased monetary policy to stimulate their economies and inflation. Almost all of them maintained that their prime target is to fuel inflation, while increasing global market share and currency depreciation are an unintended but favorable outcome. Interestingly, Bank of England nearly sidelined inflation targeting in favor of growth. “Attempting to offset fully the effect of weaker sterling on inflation would be achievable only at the cost of higher unemployment and, in all likelihood, even weaker income growth. For this reason, the MPC’s remit specifies that, in such exceptional circumstances, the Committee must balance any trade-off between the speed at which it intends to return inflation sustainably to the target and the support that monetary policy provides to jobs and activity.”*
*- Bank of England Policy Statement
UK’s headline inflation has been overshooting MPC’s target for a while as it spiked to 2.9% in May(Y-o-Y). Most market participants have attributed this is weaker cable, which is trading more 10% lower on Y-o-Y basis, leading to supply side inflation in economy. Though, year-on-year on inflation has definitely affected by weaker cable, but month-on-month inflation should have relatively low impact cable movement. UK’s m-o-m inflation has remained sticky at 0.40% in last three months. (Even a 0.2% m-o-m inflation is equivalent of 2.43%, well above inflation target).
One counter-argument is recent inflation has failed to fuel wage growth in economy. Wage growth remained broadly unchanged at 2.4% against above 3% reading of pre-crisis level.
Month-on-Month Inflation
|
Jun
|
Jul
|
Aug
|
Sep
|
Oct
|
Nov
|
Dec
|
Jan
|
Feb
|
Mar
|
Apr
|
May
|
|
0.20%
|
0.00%
|
0.30%
|
0.20%
|
0.10%
|
0.20%
|
0.49%
|
-0.49%
|
0.69%
|
0.39%
|
0.39%
|
0.39%
|
Year-on-Year Inflation
|
Jun
|
Jul
|
Aug
|
Sep
|
Oct
|
Nov
|
Dec
|
Jan
|
Feb
|
Mar
|
Apr
|
May
|
|
0.40%
|
0.60%
|
0.60%
|
0.90%
|
0.90%
|
1.10%
|
1.60%
|
1.91%
|
2.30%
|
2.30%
|
2.69%
|
2.89%
|
Cable Movement
The GBP/USD pair, which had spiked to 1.28 handle on account of MPC vote count, has tumbled nearly 200 pips. Mark Carney has punctured rate hike expectation with fairly dovish comments. The pair has near term supports at 1.2580, previous break-out levels and 1.2550, 200 day moving average. GBPUSD pair can be bought at current levels, 1.2600 with stop loss below 1.2550 levels and target 1.2850.
First Published On 26th June 2017
