Inflation readings hang over the GBP and CAD today as the United Kingdom and Canada release their latest CPI results.
The April consensus for the UK’s inflation rate is 9.1 percent on an annual basis compared to 7 percent in March, but forecasts are probabilities, not certainties. The GBP currency crosses could see volatility if the actual results are worse-than-expected.
Traders and investors are hoping for inflation to cool off as a result of the Bank of England’s monetary tightening. If inflation keeps rising, this scenario supports continued interest rate hikes in the UK. If inflation has cooled, the BoE’s hawkishness may be paying off.
In either scenario, the GBP is already under pressure from a stronger USD and could use the support from a cool-off in inflation. In the case that inflation proves to be hotter than expected, the GBP may see a sell-off because recession fears are like thorns in the side of the currency markets.
Canada’s inflation rate for April is seen at a consensus of 5.4 percent on an annual basis compared to 5.5 percent in March. Like the GBP, the CAD is under pressure from a strong USD.
“The main factor has likely been the strength in the US dollar, which has benefitted from safe-haven flows as the Ukraine war broke out as well as a sharp rise in US yields.” Bank of Canada Deputy Governor Toni Gravelle.
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In other trading news, spot crude oil prices remain elevated as geopolitical events continue to stir up supply-side fears. The bulls thrust the main benchmarks WTI and Brent upwards in the last 48 hours, reacting to the red flags of supply-side threats from the conflict in Ukraine coming at a time when demand for travel and transportation is rising rapidly.
Gold spot prices are on a downward trend at the time of writing as the USD becomes more attractive to safe-haven buyers. USD-denominated Treasuries are expected to offer higher yields in the climate of rising interest rates.
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How do inflation readings affect currency movements?
Inflation readings are also known as Consumer Price Index (CPI) benchmarks.
They affect currency movements when they are higher or lower than normal. As a rule, central banks aim for a 2 percent inflation reading on an annual basis, in order to encourage price stability. When prices heat up during periods of economic growth, central bankers tend to raise interest rates to keep inflation under control. When interest rates rise, the national currency can appreciate as investors and traders take up assets like bonds denominated in that currency. Rising demand for the currency often means that the value of the currency rises.
This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.