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British Pound (GBP) Weekly Forecast: Will CPI and PPI Continue to Diverge?

GBP Analysis & News

  • Focus on CPI and PPI data despite BoE acknowledgment of higher inflation outlook
  • EUR/GBP attempting to hold above 0.85 whilst GBP/USD avoids falling below 1.38

It hasn’t been the best week for Sterling overall and focus next week is likely to shift towards inflation data for the UK out on Wednesday. The yearly July CPI figure is expected to come in a little softer than last month at 2.3%, which would be the first drop since March this year, whilst the monthly reading is expected to come in at 0.3%, down from 0.5%, and it would be the second month with a weaker reading if confirmed. The core CPI reading is expected to come in at 2.2% year on year.

British Pound (GBP) Weekly Forecast: Will CPI and PPI Continue to Diverge?

Economic calendar provided by dailyfx.com

The Producer Price index (PPI) for July will also be released on the same day, and I would expect investors to be keeping an eye out for this data to try and gauge how prices pressures are or aren’t flowing down the production line, which will then have an impact on consumer price inflation and company profits. So far in June we saw an unexpected drop in the monthly PPI input data, from 1.2% to -0.1%, meaning that the prices of materials going into the production process were cheaper than the previous month. The monthly PPI output data came in at 0.4%, down from 0.8% the previous month, which showed that the drop in input prices hadn’t yet fully translated into cheaper products.

That is normal as it may take a few weeks or months to see the full impact of price changes, so it will be interesting to see what the input and output data shows for July to see if this divergence within the productions line until the end consumer continues.

That said, the inflation data out next week is likely to have little effect on the Bank of England’s monetary policy decision, given how the bank has already said they are expecting inflation to spike above the 2% target for the next few months as the economy rebalances from the impact of Covid and they’ll be keeping an eye on the jobs market once the furlough scheme ends.

Traders are likely to be paying attention to the data, there is possibly a greater downside risk than upside, given how a weaker than expected reading would allow the bank some more breathing room to act, and would likely be a damper on the Pound which is positioned for a strong reading.

GBP/USD & EUR/GBP Daily Chart

British Pound (GBP) Weekly Forecast: Will CPI and PPI Continue to Diverge?

GBP pairs are finishing the week mixed, with EUR/GBP putting in a good attempt at breaking out of the descending channel once again, whilst GBP/USD is attempting to rebound above 1.38 despite having seen lower highs and lows for the last two weeks. If EUR/GBP is able to close the week above 0.85 then it has a good chance of extending the bullish reversal until 0.8550 into the new week. For GBP/USD, the key support to watch out for is 1.3719.

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— Written by Daniela Sabin Hathorn, Market Analyst

Follow Daniela on Twitter @HathornSabin