Pound Surges As Rampant Shoe Inflation Spurs Hawkish BoE Bets

Ok, well the BoE probably could have done without this.

Two days ahead of the policy meeting, we got inflation data out of the U.K. that showed consumer prices rising 2.9% y/y, ahead of estimates and the fastest pace since 2012:

Inflation

The core number was a solid beat as well at 2.7% y/y versus estimates of 2.5%.

 

Apparently, the pound’s depreciation since Brexit is making everything more expensive. Shoe inflation, for instance, is running (no pun intended) at a blistering 4.6% y/y.

Clearly, this puts policymakers in a bind. The hawks will be louder now and this could conceivably push the vote to 6-3 (as a reminder, with these BoE decisions, all you’re looking at is the vote). “The climb in U.K. inflation would make it easier for the hawks to be more vocal when BOE announces its policy decision on Thursday,” Stuart Bennett, head of Group-of-10 currency strategy at Banco Santander SA, writes on Tuesday, adding that “the market may now position for a closer vote, so a 7-2 could pull sterling lower.”

Here’s what he means by the “market could position for a closer vote”:

GBPUSD

The SONIA curve repriced to show the first BOE rate hike in August of 2018.

Uncertainty around Brexit will of course continue to serve as a countervailing force, which brings us to the cruelly ironic (and exceedingly ridiculous) part of this whole charade. Brexit pushed the pound lower which drove up inflation, and now, thanks to that rise in inflation, the pound is moving higher on expectations the CPI data will force the BoE to be more hawkish.

Speaking of Brexit, U.K. legislation to pull Britain from the EU cleared an early parliamentary hurdle today as lawmakers approved a second reading of a bill that transfers EU legislation into U.K. law.

One more step on the road to oblivion. Congrats Britain. You can thank populism.

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