This morning’s UK inflation numbers were below forecasts, although the pound – already lower on the day – didn’t respond much. This is not a surprise whatsoever as the focus remains fixated firmly on Theresa May, with investors expressing their disappointment over the Prime Minister’s latest Brexit plan. The GBP/USD hit its lowest level since January 4, while the EUR/GBP climbed to its best level since mid-February.
It looks like the Conservatives have had enough of their Prime Minister, as calls grow ever louder from her own party to quit. Although Mrs May looks dejected, she will not bow out without a fight. She still fully intends to put her Withdrawal Agreement Bill to a vote in the Commons in the week beginning June 3 for one last time. This time, she has promised to offer Parliament a choice on customs arrangements and a vote on a second referendum, if they pass her withdrawal agreement bill. Essentially, the deal is very similar to the previous three that have already been rejected and offers nothing significant to appease hard line Brexiteers.
UK CPI climbed to 2.1% year-over-year in April from 1.9% in March, while core CPI remained unchanged at 1.8%. Both measures were below forecasts of 2.2 and 1.9 per cent, respectively. With the pound weakening further, import costs will increase further for producers. But with margins already squeeze, the extra costs might be passed down to the consumer, raising consumer inflation further in the months ahead. Eventually, the Bank of England may have to raise interest rates to prevent inflation from overcooking. However, they have allowed it to rise well above their 2% target in recent times because of Brexit uncertainty and will probably do so again while uncertainty remains. Consequently, traders are continuing to ignore UK data – even if we have had more forecast-beating numbers here than in the Eurozone and the US over the past few months.
The EUR/GBP was extending its gains at the time of writing, a day after it broke decisively above its 200-day moving average around 0.8760. Unless it goes back below this average, the path of least resistance would remain to the upside, with the bulls eyeing the 61.8 and 78.6 per cent Fibonacci retracement levels, at 0.8870 and 0.8978, against this year’s high as their next near-term targets.
Source: FOREX.com and TradingView