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Great Britain Pound’s Future Hangs on Inflation Data

March 20, 2017 at 10:35 by Vladimir Vyun

A fan of 20-pound billsThe Great Britain pound rallied last week, not least due to Bank of England’s policy statement that was less dovish than market participants had anticipated. But will the currency be able to maintain gains amid Brexit uncertainty and fears?

The BoE took a very dovish stance after the Brexit referendum, boosting monetary stimulus and preparing to make its policy even more accommodative to support Britain’s economy that should have been hurt by the voting outcome. Yet the economy showed no signs of weakness in the months following the Brexit vote, prompting the central bank to take more neutral position. Lately, macroeconomic indicators were suggesting that the UK economy had felt the impact of the Brexit at last, showing vulnerability. Yet now, the BoE has another concerns: rapidly rising inflation. With Brexit fears and the preemptive actions of the central bank, the pound dropped sharply, forcing importers to raise prices. While Britain’s policy makers do not seem to be overly concerned about inflation overshooting their 2% target, one member of the Monetary Policy Committee voted for raising interest rates at this month’s meeting. That means more hawkish votes may follow at coming meetings, especially if inflation continues to rise.

That is why this week’s inflation report will likely have significant impact on future decisions of the BoE members and thus on the performance of Britain’s pound. The Office for National Statistics will release the Consumer Price Index report on Tuesday. Analysts predict that it will show growth by 2.1% for February after January’s 1.8%. Just four months ago consumer prices were rising at less than 1% rate.

Retail sales data will be another important economic release this week. It will come out on Thursday, and forecasters promised that it will show an increase by 0.4% for February. The indicator was down 0.3% in January.

DailyFX issued a neutral forecast for the sterling, saying:

More signs of confirmed inflationary forces will need to be seen before a bullish forecast can be initiated.

Forex Crunch made a bearish forecast for the GBP/USD currency pair, arguing that the US dollar should rebound despite last week’s losses caused by the “dovish interest rate hike” from the Federal Reserve.

If you have any questions, comments or opinions regarding the Great Britain Pound, feel free to post them using the commentary form below.

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