The British pound struggled to hold onto its gains today despite stronger than expected growth in producer prices and an improvement in the trade balance.
Producer prices rose by the fastest pace on annualized basis in 22 years as the cost of raw materials surged. However the move in producer prices and consumer prices are not always correlated, especially if weak demand prevents producers from passing on their costs to consumers. Nonetheless, the rise in PPI will probably keep the tone of Wednesday’s Bank of England Quarterly Inflation report hawkish. As for the trade balance, the improvement was very marginal with exports rising by less than GBP 0.1 billion and imports falling by approximately the same amount.