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22.03.2023 02:28 PM
Bank of England is stumped as inflation resumes growth

Pound continued to update monthly highs after news emerged that UK inflation jumped unexpectedly in February. The gain was led by food and energy bills, which put additional pressure on households.

The report said the consumer price index rose 10.4% year-on-year, beating economists' forecast of 9.9%. In January, the figure was at 10.1%. Month-over-month figure is up 1.1%.

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As noted above, the largest contribution was made by restaurants, cafes, food and clothing, but it was partly offset by the downward contribution of lower prices for leisure services and fuel prices. The UK Office for National Statistics noted that the index, including house prices, rose by 9.2% in 12 months, up from 8.8% in January.

Considering this, it is too early to say that the UK's cost-of-living crisis is ending as UK households continue to struggle with high food and energy bills. At the same time, many unions and workers continue massive strikes due to disputes over wages and working conditions.

The situation is a big headache for the Bank of England who wants to end its program of aggressive interest rate hikes. Inflation remaining stubbornly high will keep the bank from stopping rate increases, thus, there may be a rise above the current 4% tomorrow.

However, recent developments in the banking sector worry everyone as it is also detrimental to the economy. The Monetary Policy Committee is currently facing considerable disagreement over determining the best way forward.

As recently as last week, the independent Office for Budget Responsibility predicted that UK inflation would fall to 2.9% by the end of 2023. Roughly the same statements were made by UK finance minister Hunt, when he approved next year's budget. To what extent the banking crisis will change this forecast remains to be seen.

In terms of the forex market, pound bulls are ready to keep storming the monthly highs, but they have to keep the quote above 1.2230 and breakthrough 1.2280. That will push the pair to 1.2330 and 1.2390. Should bears take control of 1.2230, a slide towards 1.2180 and 1.2130 is possible.

In EUR/USD, bulls still have all the chances to renew the March highs, but to do this they need to hold the quote above the support level of 1.0760. That will allow EUR/USD to rise beyond 1.0800 and head towards 1.0835 and 1.0875. In case of a decline, the pair will fall below 1.0760 and hit 1.0720 or 1.0690.

Jakub Novak,
Analytical expert of InstaForex
© 2007-2024
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