While most of the majors were looking at significant volatility thanks to a market-wide dollar rally, GBPUSD was particularly active this morning owing to a sharp increase in inflation expectations. Heading into the active European session, there were no major economic releases scheduled for release.
However, a proprietary consumer inflation expectation survey compiled by Citigroup and YouGov proved an incredible driver for the sterling. With speculation growing that the MPC has already delivered the last of its cuts in its recent rate cycle, fundamental traders are clearly hungry for any data that will tip the scales in the inflation/growth clash. Therefore, when the lower tier indicator hit a record high with British consumers forecasting inflation trends to hit a 4.1 percent clip over the coming year, the market responded in kind. Since this indicator was not an official government reading of current price pressures and instead a reflection more of sentiment, the indicator was interpreted as a sign that consumer spending would plunge as Brits see their purchasing power declining. Looking ahead to Thursday’s session, we may see another round of volatile price action and perhaps a major breakout. The Nationwide housing inflation report is expected to contract for a seventh consecutive month while the CBI Distributive Trades Report for May is expected to reveal a drop in activity among retailers. This will be followed much later in the session by the GfK consumer confidence report.