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Selling GBP/USD, Despite the Jump in UK Inflation to 3.1%

Posted Wednesday, September 15, 2021 by
Skerdian Meta • 2 min read

The latest report shows that UK annual inflation jumped up to +3.2% on an annualized basis in August, which was the highest level since March 2012, amid a record increase in the annual percentage on the month. While that may be due to base effects, in part, it doesn’t tell the whole story.

The “eat out to help out” scheme in the summer last year put considerable downward pressure on prices, contributing to the 1.2% jump in annual inflation in August this year. However, when you look at the monthly readings, there’s also a jump of 0.7% in consumer inflation from July to August (on both the main and core readings), so that suggests that the jump isn’t entirely due to base effects.
The 20 SMA acting as resistance today on the H4 chart

Some time might be needed to sort this out, but the overall increase in producer prices also suggests that rising cost pressures globally are translating to higher inflation in the UK, something that is transpiring in other economies as well. So, we decided to sell GBP/USD based on this, and also on the fact that this pair has formed a bearish reversing pattern below the 20 SMA.

CPI Inflation Report by ONS – September 15, 2021

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UK inflation measures
  • August CPI YoY +3.2% vs +2.9% expected
  • July CPI was +2.0%
  • Core CPI +3.1% YoY vs +2.9% expected
  • July core CPI was +1.9%

That’s quite a jump on UK consumer inflation, beating estimates of the highest levels since March 2012. This will continue to heap pressure on the BOE to move away from their ‘transitory’ narrative and perhaps tighten policy sooner rather than later.

Just keep in mind though, that base effects are also at play here, with the jump in the annual reading exacerbated by the “eat out to help out” scheme in summer last year, which put considerable downside pressure on prices in general.

UK politician, Sajid Javid, believes that the rise in inflation is temporary. it looks like Javid is still having a hard time letting go of his finance minister post (which he held for less than a year, until February last year), as he is still remarking on inflation, even though he is currently the Minister of Health. In any case, this is the typical response you’d expect from policymakers/lawmakers, but even so, I reckon there’s good case for a more hawkish tilt by the BOE next week.

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