Pound Stems Bleeding, Retail Sales Next

The British pound reversed directions on Thursday, after sliding 1.22% a day earlier. GBP/USD was trading at 1.2402 in the European session, up 0.50% on the day.

The UK releases retail sales on Friday, with an estimate of -0.2%, which would mark a third successive decline.

Red-hot inflation gets hotter

UK inflation continues to accelerate, and the April CPI of 9.0% unnerved investors and sent the pound tumbling lower. CPI jumped from 7.0% in March, and the only sliver of good news was that the reading was lower than the forecast of 9.1%.

Core CPI rose to 6.2%, up from 5.7%, indicating that inflationary pressures are broad-based. This means that the cost of living crisis isn’t going away anytime soon. In fact, it could get worse, with the BoE forecasting that the inflation could top 10% later this year.

The BoE finds itself playing catch-up with the inflation curve and has been heavily criticized for assuming inflation was transient and not tightening earlier.

The same criticism can be levelled at the Federal Reserve, but the Fed has responded with super-size 50-bps increases, while the BoE has opted for modest 25-bps hikes.

Brexit tensions are back in the form of the Northern Ireland protocol, which is exacerbating inflationary pressures.

With no sign of an ‘inflation peak,’ businesses and consumers are in a sour mood and pressure is mounting on the BoE to be more aggressive with its tightening.

The BoE has defended its policy, saying that the Ukraine war and other factors driving inflation are beyond the Bank’s control. That may be true, but the markets are looking to the BoE to right the listing ship and get a handle on inflation.

Bailey & Co. are understandably hesitant to implement 50-bps hikes, out of concern that this will stall the economy and cause a recession. I don’t envy the BoE policy makers, who must find the right pace of hikes which will lower inflation while guiding the economy to a soft landing.