U.K. Inflation Data shifts Focus to Possible May Rate Hike

The British Pound is trading higherthis morning after it was reported that annual inflation soared to 4.0 percentin January. This rate was the highest level for more than two years. Theincrease was 0.3 percent higher than December’s 3.7 percent, but lower thananalysts’ consensus forecast for a year-on-year rise to 4.2 percent.

The British Pound is trading higherthis morning after it was reported that annual inflation soared to 4.0 percentin January. This rate was the highest level for more than two years. Theincrease was 0.3 percent higher than December’s 3.7 percent, but lower thananalysts’ consensus forecast for a year-on-year rise to 4.2 percent.

Despite missing the pre-reportguess, the rate at 4.0 percent, the highest since November 2008, was double theBank of England’s target rate of 2.0 percent. This followed hikes in both theBritish VAT sales tax and higher oil prices.

The strong momentum in the inflationrate is likely to continue, making a forecast for 5.0 percent inflationreasonable. Most of all, however, the report sets the tone for the next Bank ofEngland Monetary Policy Committee meeting. The steady rise in inflation mayhave finally reached the point where the BoE has to seriously consider liftingits benchmark interest rate from a record low of 0.50 percent.

With pressure squarely on the BoE tohike interest rates, speculators are driving up the British Pound this morning.The BoE voted last week to keep the benchmark at 0.50 percent while attemptingto balance the risks of rising inflation against Britain’s fragile recovery fromrecession.

Today, however, the market will befocusing on the Bank of England Inflation Report due Wednesday. The tone ofthis report is expected to give investors further clues as to whether the BoEis prepared to raise interest rates as early as May. Whenever the inflationrate exceeds the benchmark, BoE Governor Mervyn King has to publish a letter toexplain the rise and to defend the central bank’s record low interest rates.Expectations are for King to say that the current inflationary surge is beyondthe central bank’s control. This explanation may not be enough this time tokeep the BoE from hiking as King’s low interest rate policy is beginning tolose support.

Technically the British Pound is inan uptrend, but may run into some resistance at a retracement zone at 1.6120 to1.6257. Overcoming this level means the up trend will remain intact and that anew high over 1.6278 is probable. Should sellers step up at the retracementzone, then look for the start of another leg down.

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James A. Hyerczyk has been actively involved in the futures markets since 1982. He has worked in various capacities within the futures industry from technical analyst to commodity trading advisor. Using W. D. Gann Theory as his core methodology, Mr. Hyerczyk incorporates combinations of pattern, price and time to develop his daily, weekly and monthly analysis. His firm, J.A.H. Research and Trading publishes The Forex Pattern Price Time Report... More

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