UK inflation rose again this month to its highest in ten years, boosting the prospect of a Bank of England rate hike and sending the British pound higher in value.
December 2021 UK CPI Data Release
Earlier today saw the release of monthly UK CPI (inflation) data showing the extent to which the price of a representative basked of goods and services is rising. The data showed that year on year, inflation rose by 5.1%, higher than the 4.8% which was the consensus forecast. The increase in prices is unusually wide, and the UK is seeing a much stronger rise in the price of goods, increasing at an annualized rate of 6.5%, then services, which increased by 3.3%.
It is therefore clear that inflation rose by notably more than expected. The annualised inflation rate of 5.1% is the highest rate recorded since 2011. However, it is worth noting that UK inflation remains markedly lower in both absolute and historic terms than seen in the US right now.
Market Reaction to UK CPI Data
The release was made just before the start of Wednesday’s London session, so at the time of writing, markets have had only about two hours to react. However, the reaction has been clear if not very large: the British pound has risen in value against almost all other currencies. The GBP/USD currency pair is up by 0.24%, the EUR/GBP currency cross is down by 0.27%, and the GBP/JPY currency cross is up by 0.29%. The major British stock market index, the FTSE 100, has fallen by 0.14%.
These price movements are not large by any means, but they do show that the relative value of the pound has risen across the board since the CPI data release.
It is likely that as the Bank of England showed last month that it is inclining more towards an interest rate hike, the market sees this higher-than-expected inflation data as more likely to bring this rate hike forward, which is boosting the value of the pound.
What Does This Mean for Traders?
Traders can consider taking a more bullish bias on the British pound. This could be expressed by looking to day trade GBP/USD in a long direction today, as the price remains far off its average true range but buying on dips on short time frames. Longer-term traders might instead seek to slowly build a position by adding more if the GBP/USD continues to go up, or alternatively to wait for a breakout beyond the nearest key resistance level at $1.3310.
On a more cautionary note, it should be noted that the price movement we are seeing the British pound right now is far from exceptional.
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