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Last week saw the Bank of England (BoE) taking a more hawkish turn, after yet another rise in inflation pushed the marginal propensity to consume (MPC) closer towards enacting the first rate rise since 2007. With HSBC now expecting a rate rise in November, there is no surprise that we are seeing the pound come into favour. However, while the pathway of interest rates will concern most home owners, traders will be focusing on what this recent move will mean for the pound.
The end of the year should be a busy time from a monetary standpoint, and markets have high expectations from the BoE, European Central Bank (ECB), and the Federal Reserve (Fed). However, while it is notable that we could see all three of these central banks raise rates within a short period of time, it is clear that the timeline from the BoE is the one shifting sharply nearer. Although many see a BoE rate rise as being unlikely, given the ongoing fears over the Brexit repercussions, the fact is that we are seeing the chance of such a move rise alongside inflation. The chart below highlights the point that we typically see a close relationship between inflation and GBP/USD, with the bottom seen back in late 2015 providing the leading indication of the ultimate GBP/USD bottom seen a year ago. The rise in inflation seen this month has led to another strong move for the pound, and this chart points towards the likeliness of further upside, especially if we see the current trajectory of the consumer price index (CPI) continue apace.
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