GBP – Preview: Inflation Data To Tie the Hands of BOE?

The Bank of England has an important decision to make in the coming month, at its May interest-rate decision where the Monetary Policy Committee must decide whether to continue it's quantitative easing bond purchase program, or to pause it at its current £325 billion.

We know from the previous BOE minutes that 2 members - Adam Posen and David Miles - voted for a £25 billion increase to the QE program, but that was before a run of better-than-expected PMI reports which could give the area slightly more upbeat assessment of economic conditions.

While a strengthening economy - even relatively speaking - would be one reason to pause QE, another impediment could be inflationary pressures which may remain more stubborn than the BOE expected.

In late March we had 2 BOE members - Martin Weale and Spencer Dale - talk about the risks that there may be more persistence to inflation and that inflation may not slow as fast this year as MPC forecast due to rising energy prices. well there remain significant risks the downside footing a deterioration in Europe, elevated bank funding costs, and higher borrowing costs on consumers, will the Bank of England continue to use is nonstandard measures to try and help growth. What if that comes at the expense of heightened inflation?

Most recently the data has shown the annual CPI rate fall quite dramatically - from 5.2% to 3.4% in annual terms - but the expectation is that for March annual CPI will post a 3.5% reading. That remains far above the central banks preference for prices. The Bank of England has expected inflation to cool going forward because of spare capacity in the economy, but I wonder if it considers the diminishing returns from the each new successive round of bond buying.

On Wednesday we will get further insight into the thinking of the BOE when it releases its Meeting Minutes, at the same time that we get the latest round of data from the labor market - the Achilles' heel of the UK economy.

But before that we anticipate the CPI data. If prices come in stronger-than-expected it could bolster the case of those committee members who do not feel more bond purchases are necessary and therefore would tie the hands of the BOE. Such a development would be a positive for the GBP other factors held equal.

If inflation cools below its level in February, then this impediment to more QE lessens. The CPI data will therefore be the curtain opener for a busy week of fundamentals for the UK economy, and can give us further insight into the direction of the GBP.

If at the end of it, we see the chances of the BOE holding its fire on more QE rising, I will be most interested in the impact on that EUR/GBP as it trades near a critical support level and if broken could open up further downside targets including the lows from 2010 (at 0.8140 and 0.8070).

We will review the response of GBP crosses to this release in our upcoming Market Intelligence Briefing.

Nick Nasad is a macro economist, market analyst, and educator; and one of the main contributors to FXTimes.com - provider of Forex News, Analysis, Education, Videos, Charts, and other trading resources.

Information and opinions contained in this report are for educational purposes only and do not constitute an investment advice. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness. FXTimes will not accept liability for any loss of profit or damage which may arise directly, indirectly or consequently from use of or reliance on the trading set-ups or any accompanying chart analysis.