UK inflation offers hope for Bank of England

2 mins read

By Craig Erlam  

It’s been a long time coming, but inflation in the UK is finally on the decline and in a rare show of good news, it’s falling at a faster pace than expected on both the headline and core levels.

We haven’t been treated to many reports like this in recent years, and even when we have any enthusiasm has quickly been extinguished. But this feels different.

Without wanting to fall victim to the “this time it’s different” mantra that often precedes a terrible turn of events, there is something more promising about this shift.

It follows similar declines in the US and eurozone in recent months, both of which were sharper than expected and at the headline and core level. Unless this is a blip across the board, which is possible, it may be a sign that inflation is on a path to more modest and sustainable levels.

Of course, there’s still an long way to go and the central bank is not going to declare victory on the back of one release.

But those wild interest rate forecasts of 6.5%+ that we’ve been seeing may start to be pared back, perhaps quite significantly as it becomes clear that favourable base effects combined with lower energy and food inflation, and the impact of past hikes start to have a substantial impact on the data.

The pound has fallen quite heavily on the back of the release, which probably reflects those expectations now being pared back. Peak rate expectations may now be behind us which could make for a more hopeful second half of the year.

I don’t want to get carried away but then, upon seeing the release, I was immediately reminded of the famous Office US “It’s happening!” scene that is so often widely circulated on social media, so perhaps I also, in the words of Michael Scott, need to stay calm.

Oil flat, recent developments positive

Oil prices are a little flat after bouncing back on Tuesday.

Since breaking above the recent range highs late last week, oil prices have been a little choppy, although importantly they have held above that prior range and, in the case of Brent crude, seen support around the previous highs.

That could be viewed as a bullish technical signal, although that will depend on a number of other factors including the economic data and what producers are doing.

Both have been favourable for prices recently, helping Brent break back above $80 for the first time in almost three months.

Gold eyes another move above $2,000

Gold broke higher again on Tuesday after briefly paring gains late last week and early this. Lower yields and a weaker dollar continue to boost its appeal on the back of some more promising inflation data and lower interest rate expectations.

The yellow metal broke above $1,960 on Tuesday before running into some resistance around $1,980.

It’s now closing in on $2,000 which is the next major barrier to the upside, a break of which may suggest traders have turned bullish on gold after two months of declines.

Is bitcoin vulnerable?

Bitcoin is back above $30,000 on Wednesday, but looking vulnerable to another dip below.

Broadly speaking, the cryptocurrency has been range-bound over the last month, but it has drifted toward the lower end of this and the move below $30,000 may have made some nervous.

If we see a significant break lower, the next key area of support may be found around $28,000.


Craig Erlam is Senior Market Analyst, UK & EMEA at OANDA

Opinions are the author’s, not necessarily that of OANDA Global Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. Losses can exceed investments.