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UK CPI jumps to 7%, highest since 1992

The UK's latest inflation reading is likely to have left many investors with a bittersweet taste, as the Bank of England now faces the challenging job of combating soaring inflation whilst avoiding hindering growth in the economy.

(Video Transcript)

CPI data

Let's take a look at some of the data that's come out this morning, because we've had the latest inflation reading out from the UK.

Surprising numbers here - a very, very strong reading with headline inflation coming in at 7% year-on-year, the CPI data there. We were expecting to see it at 6.7%, which was already a big jump from the 6.2% we saw in February. Producer Price Index came in at 11.9% year-on-year - again, much higher than 11.1% we were expecting and higher than the 10.1% seen in February. The Retail Price Index is at 9% year-on-year, higher than 8.8% and also 8.2%.

GBP/USD technical outlook

Let's take a look now at a chart of the pound to see how it's trading. I'm going to zoom in here to a 5-minute chart to see what the immediate reaction was. A strong start here for the pound. This is prior to the announcement here, starting at around 6am UK time, a strong rally, probably in anticipation of these numbers coming in.

Then as soon as we saw the data, we did see a bit of a spike to the upside above $1.30, which has been a key trading area as of late. And then a full reversal to the downside and you can see this really, really strong pullback here in terms of the short-term chart as markets were digesting the news, coming down below $1.30 at the moment.

Now, what does this mean? We were expecting markets to anticipate this rise in CPI data. As it came in much stronger than expected, you would assume that the pound would trade higher because of what this means later on down the line for the Bank of England's meeting in May. Are they going to raise rates higher than expected? Is that going to make the pound more valuable with this rate hike?

But of course, that also means this is a double-edged sword with inflation. It means that these rising cost are putting pressure on households. You can see consumer prices there, 7% year-on-year, that's a massive increase in consumer spending and also in terms of household spending.

Does that mean we are going to have an economic slowdown? Does that mean that the Bank of England is going to have to be more careful now with their monetary policy trying to combat this surging inflation, but also avoiding a recession, which would lead to stagflation, which is the fear in the market right now?

So potentially not a reaction expected by most in the market here from the pound. We've also got a bit of strength in the dollar because of that safe haven demand, because of those same concerns about economic recession and surging energy prices and inflation.

So all-in-all, GBP/USD still trading to the downside, a pretty clear descending trendline now as you can see. For me, if we haven't seen this spike higher on this strong data from the UK and what this implies from the Bank of England, I am struggling to see how the pound reverses in the short-term and potentially we are heading back towards the 50% Fibonacci at $1.2828.

It seems likely now that we are going to find some support around this area at $1.2855 even, as the pound seems to be continuously weakening here against the US dollar.

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