The inflation report was one of the most-awaited pieces of economic data out of the United Kingdom this week. In October, inflation in the UK reached levels last seen over 40 years ago.
More precisely, the prices of goods and services climbed 11.1% YoY. Furthermore, the Core CPI y/y, a measure that excludes volatile food, energy, alcohol, and tobacco items, reached 6.5%.
The market expected a much lower print for both the CPI and Core CPI data. However, rising domestic fuel prices and housing and household services pushed inflation much higher.
A currency reacts to changes in inflation because traders anticipate the next change in interest rates. When inflation exceeds the central bank’s target, traders expect the interest rates to rise more aggressively.
But this cycle is different.
Inflation is higher than the central banks’ target in most of the advanced economies. It is becoming entrenched in households’ and businesses’ expectations, making it even more difficult to fight.
One thing is sure – the Bank of England did warn about inflation reaching double-digit territory in the last months of 2022. Therefore, today’s report, while shocking, it is not unexpected by the Bank of England.
So is this bullish or bearish the pound, particularly the GBP/USD exchange rate?
GBP/USD meets resistance at 1.20
After the financial markets reacted to the mini-budget proposed by the previous minister earlier this year, the pound collapsed. The GBP/USD reacted the most, dropping below 1.05.
But buyers emerged, and the pair quickly squeezed higher. 1.20 is an important resistance level, one that offered support previously. However, only a climb above the previous lower high would invalidate the bearish trend.
Perhaps the most critical thing for GBP/USD traders is that this appears to be a US dollar move. The dollar is sold across the board after the cooling inflation data in the United States, and the GBP/USD exchange rate plays along.
In other words, today’s inflation report from the United Kingdom was already priced in, as warned by the Bank of England in the past. Therefore, expect the GBP/USD rally to continue if the US dollar remains offered.