The British pound was mostly lower yesterday despite stronger-than-expected inflation figures. As CPI came in 1% higher than the target inflation rate, the Bank of England will be required to write an explanation to HM Treasury. Despite the strong figures, few are expecting a policy response from the Bank of England. Instead, trading in the pound remains dominated by progress relating to Brexit. Looking at the latest headlines, the Financial Times (paywall) is reporting that the EU has ruled out starting trade talks until March. According to the story, EU officials have been irritated by David Davis' comments that the recent agreement is not legally enforceable. While the UK believes a good trade deal (with access to the single market) can be negotiated, the EU has insisted that any deal must follow the template based on the EU/Canada free trade agreement. So far, there has been limited progress in resolving these differences. Our short-term and medium-term outlook remain bullish.
GBP/USD is currently just above 1.3310. EUR/GBP is flat today and the pair is currently trading above 0.8810. The pound is flat against both the Australian dollar and the Canadian dollar. GBP/AUD is above 1.7590, while GBP/CAD is just above 1.7130.
This is an important week for economic data and events from the UK. Producer prices met expectations (3%) while the consumer price index (3.1% vs. 3% expected) was higher than estimates. Later today, we’ll get ILO unemployment and claimant count changes. Thursday is the big day, with a Bank of England rate decision and statement. While the Bank is widely expected to remain on hold, markets will be focused on the BoE’s inflation outlook for 2018. Last week, the pound rallied and then sold off following an agreement with the EU on the Irish border, the Brexit bill and the rights of EU citizens following Brexit.