The British pound finally managed to break below the 200 SMA on the weekly charts at 1.9022, a level which the pair has held above since June 2002.
Perhaps the most surprising part of this is that UK CPI was stronger than expected this morning, as the annual rate accelerated to 4.4 percent. This is not only the highest level since comparable records began in 1997, but is also well above the Bank of England’s 2 percent target and 3 percent upper limit. The data puts the BOE Monetary Policy Committee in an even worse position, as robust price pressures calls attention away from widespread indications of a sharp UK economic slowdown. Last month, the majority of the MPC members voted to leave rates steady, but there was one vote in favor of a 25bp hike and one in favor of a 25bp cut. Currently, overnight index swaps are pricing in 44bps worth of cuts within the next 12 months, down from 52bps last Wednesday. Clearly, these UK CPI numbers haven’t had an extreme impact on rate expectations, but Wednesday’s release of the BOE’s Quarterly Inflation Report might. This has great market-moving potential as it will serve as a more timely view of the MPC’s bias (the August 7 meeting minutes will not be released until August 20). Everyone knows that inflation is a problem in the UK, but if the Bank’s GDP projections are revised down, this news would support the case for a British pound decline toward 1.8500.