The CPI reading peaked above 3.0%, which means the BoE chief will have to write an explanation letter to the finance minister. Basically, the faster rises, the more aggressive should be monetary tightening. So today’s numbers are theoretically GBP-positive. But there are a few reasons why the currency reaction is so muted.
Firstly, the market is still focused on Brexit drama which despite the latest progress still involves risks and uncertainties. That’s why traders tend to sell GBP on rallies lately. Secondly, the pound is nervous ahead of the upcoming events – tomorrow’s employment and weekly data as well as the BoE meeting on Thursday.
Despite today’s CPI figures, the market participants doubt that Mark Carney will embark on a more aggressive rhetoric after a so-called “dovish hike” in November, as many Brexit issues are still unresolved and pose risks to the economy.
Nevertheless, there is still a chance that the will note the progress in Brexit negotiations and hint at the need of faster policy tightening due to the fears of overheating. If so, the pound may attract buyers in the area of December lows above 1.33, which are attractive for opening longs. In this scenario, the initial target is 1.3380. The move above will introduce scope to 1.34 and higher.