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The Trader: Sterling up on inflation reading, FTSE clears 7200

Some of the initial shine has come off UK stocks as inflation breaches the Bank of England's target in quick fashion
The Trader: Sterling up on inflation reading, FTSE clears 7200
  • Sterling rises on back of strong UK inflation number
  • FTSE rallies initially, but then runs out of steam
  • Few obstacles to blue chips regaining pre-pandemic highs from here

Sterling caught a bid in early trade as UK inflation numbers exceeded expectations and the Bank of England’s target. CPI rose 2.1 per cent last month on an annual basis, up from +1.5 per cent in April. The rate of month-on-month inflation was a racy +0.6 per cent as the economy reopened more. Of course, base effects exert a strong influence but a couple of points similar to the US data to be made: First the core reading of +2 per cent was well ahead of the consensus +1.5 per cent; secondly watch that second consecutive +0.6 per cent month-on-month reading, which is about more than just base effects from last year.  

GBPUSD rallied from 1.4080 to 1.4120, running into horizontal resistance at the 78.6 per cent retracement level, immediately after the release of the data as above-target inflation will skew the Bank of England’s reaction more towards tightening sooner. It was not a major move – markets will want to see more data, plus we have the Fed statement and presser later that is likely keeping a lid on the moves. The Bank’s outlook on inflation suggests it is in no rush to raise rates this year – but if we get more readings like this one it may choose to raise rates sooner than currently forecast. Governor Bailey has made it clear the MPC will tighten should inflation consistently exceed the target. Inflation pressures here may not be what they are in the US, but nor does the Bank of England have such a politically motivated employment mandate. 

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