Hi all, I’ve just signed up to Babypips in the last few days.
I was browsing through the Economic Calendar and one of the forthcoming events is the release of the UK Consumer Price Index, i.e. the rate of inflation.
It states that ‘A higher than expected reading should be taken as positive/bullish for the GBP.’
Can anyone explain why this is the case? Surely inflation in excess of the forecasts and/or the BOE’s target decreases confidence in the British economy?
Any help would be great.
the Measure of a currencies strength can be largely viewed by viewing it’s inflation rates.
Higher inflation is good for the currency, not bad
now. to truly understand all this stuff , you really do need to go out and get an economics degree.
otherwise, Accept what the description tells you and TAKE IT WITH A GRAIN OF SALT as opposed to the word of god.
It’s a generalized statement.
A “higher than expected reading” assumes that the economy is growing, and will continue to grow. And implies that BoE would raise rates to “control” inflation. This would be positive for GBP in the sense that interest rate differentials and possibly GDP growth rate differentials between other countries would diverge in GBP’s favor and attract capital in GBP-denominated assets (bonds, equities, etc.), increasing demand for GBP.
Naturally, if inflation rises out of control, that would be negative for the economy, and have the opposite effect of what I just mentioned above. Basically, a loss of confidence in the UK economy would reduce demand for GBP and even cause GDP-denominated assets to be sold off so capital can leave UK.
As forexgump says CPI is usually perceived as a leading indicator of interest rates, Central Banks over the years have used rates in a response to CPI - thus as inflation has been on a downward trajectory then so too interest rates.
When there was recent talk (back a couple of years) of deflation so also there was talk of minus interest rates.
CPI is now on the up, so too rates, but you have hit the nail on the head with UK numbers.
Context is king, CPI is rising not because of increased wages or increased productivity or increased consumer spending, the 3 wise kings that often drive CPI - it’s being driven by… well the effect of the uncertainty currently doing the rounds.
Sad to say but there are quite a few companies taking advantage of that uncertainty via pricing.
So yes, CPI positive ‘should’ mean a buy on GBP …but I’d be careful.