UK Inflation Driven by Rising Petrol Costs

Today’s data from the Office of National Statistics (ONS) has revealed that UK inflation jumped in March due to rising petrol and clothing costs. The latest figures indicate the UK consumer price index (CPI) rose to 0.7% in March, up from 0.4% in February, which was mostly in line with economist’s expectations, although just under the 0.8% that was forecast.

Economists expect inflation will rise further as coronavirus restrictions continue to ease and the economy is unlocked, with pent-up consumer demand for goods and services. It’s estimated that UK households have collectively saved around GBP 180 billion worth of savings as a result of UK lockdowns.

Bank of England (BoE) Chief Economist, Andy Haldane, has previously referred to UK inflation as a tiger that could be easily stirred by the economic events over the past year. As a result, it’s possible that the Bank of England (BoE) could raise interest rates in a bid to maintain low but stable inflation levels but not until their inflation target of 2% has been met. The Bank has predicted that UK inflation could rise to 1.9% by the end of the year, although many economists have indicated that it could surpass 2% before this point.

Inflation is likely to be pushed higher due to supply pressures stemming from COVID-19 and Brexit related trade disruptions. Ofgem’s energy price cap and surging oil prices will also be a contributing factor, as the price of petrol was increased to 123.7 pence a litre last month, which is 4.4 pence higher year on year.

Paul Craig, a portfolio manager at Quilter Investors, stated that UK inflation could become noticeably higher if consumer spending escalates following the easing of lockdown restrictions and households spending some of their accrued savings.

Whilst the UK’s economic outlook remains optimistic, the British pound (GBP) has fluctuated against its key currency competitors this week.

British pound falls from monthly highs against US dollar

The British pound (GBP) rose to a monthly high against the US dollar (USD) as it climbed above the USD 1.40 resistance level. However, during the midweek trading sessions, the currency pair has lost momentum, with the British pound to US dollar (GBP/USD) exchange rate now trading 0.21% lower at USD 1.3904.

With pound Sterling (GBP) being described as a pro-cyclical currency by market analysts, it remains sensitive to global economic events and investor sentiment, meaning the UK currency is permanently subject to volatility.

Whilst the UK economy is on track for a recovery in Q2, rising coronavirus cases in the Eurozone, as well as reports of a new strain of the virus being identified  in India, continues to weigh on the British pound (GBP).

Japan is also experiencing a surge of coronavirus infections as the Japanese Government looks to tighten restrictions ahead of the Olympics in just three months’ time.

The US dollar (USD), however, has outperformed its G10 rivals this week, verifying its status as a safe-haven currency as global coronavirus cases surge. The US dollar is particularly benefiting from the rising infections across India and Japan, encouraging investors to return to the Greenback. Derek Halpenny, Head of Research at MUFG, states, “while the reversal of US dollar strength is notable, we are cautious over how much further this US dollar sell-off can go.” Halpenny commented that economists would remain bearish over the long-term due to this cautiousness, remaining aware of rising COVID-19 infection rates.

With the UK economy set to benefit from public spending following the reopening of business last month, it’s anticipated that the US dollar’s (USD) dominance will be short-lived.

British pound to euro struggles as Eurozone outlook improves

The British pound (GBP) also experienced a monthly high against the euro (EUR) yesterday as the currency pairing reached above EUR 1.16. During today’s London session, however, the British pound to euro (GBP/EUR) exchange rate is trading lower at EUR 1.1589.

Whilst the outlook for the British pound (GBP) remains appealing, Sterling is struggling to hold on to gains against the single currency as the Eurozone ramps up its coronavirus vaccination campaign. Zach Pandl, Co-Head of Foreign Exchange Strategy at Goldman Sachs, says, “Europe is really the main region which is going to see accelerating vaccinations this quarter. And later in the year, we will see accelerating vaccinations, broadly, in emerging market economies.”

The euro (EUR) is likely to be impacted by the European Central Bank’s (ECB) monetary policy meeting scheduled for tomorrow. The Bank is not thought to make any significant changes to monetary policy, but if the ECB maintains an optimistic tone, it is likely to boost euro (EUR) sentiment.

Canada dollar cautious ahead of Bank of Canada meeting

The course of the Canadian dollar (CAD) looks to be driven by the Bank of Canada’s (BoC) monetary policy meeting today due to the Bank’s decisions surrounding quantitative easing. The BoC had taken a forceful approach when buying government and corporate bonds over the past year. However, the Bank now appears to be becoming more cautious regarding its generosity.

It’s forecast that the BoC will reduce its quantitative easing programme from CAD 4 billion a week to CAD 3 billion a week, maintaining its 0.25% rate. The decision comes as Canada sees a rapid rise of coronavirus infections, leaving many to wonder if the Bank will hold off on plans during the resurgence of cases.

Francesco Pesole, FX Strategist at ING Bank, states “the recent spike in virus cases in Canada suggests it shouldn’t surprise on the hawkish side, despite a more benign bond environment.”

That being said, the recent release of manufacturing PMI for Canada jumped to its highest level in 10 years, reaching 58.5 in March, as well as falling unemployment rates to 7.5% in March from 8.2% in February, suggesting a more robust economy.

At the time of writing, the British pound to Canadian dollar (GBP/CAD) exchange rate is trading 1.09% lower at CAD 1.7373 as investors await the outcome of the BoC meeting and the impact this could have on the Loonie.

Australian dollar continues to outperform currency rivals

The Australian dollar (AUD) has remained consistently strong this year, having decided to impose coronavirus restrictions early, paving the way for economic recovery.

The ‘Aussie’ dollar outperformed its major currency competitors during the midweek trading session, displaying resilience against the US dollar (USD), where all other currencies failed to do so, with the Australian dollar to US dollar currently trading 0.40% higher at 0.7755.

During its April policy meeting, the Reserve Bank of Australia gave an optimistic view of the Australian economy but was sceptical that it will meet its 2% inflation target. Recent data also outlined a 1.4% growth in Australian retail sales during March, well above the 1% that was expected.

With such positive recent data, it’s anticipated that the Australian economy will continue down the path of prosperity for the foreseeable future.