Pound devaluation as an aftermath of Brexit was a true gift for the Bank of England, which several years ago, along with many other developed countries, struggled with the problem of stagflation. However, the Bank’s wrong policy, the gift might go as fast as it appeared. This is evidenced by the latest data on British consumer inflation. The base figure, which excludes products with volatile prices, unexpectedly slowed to 2.3% with a forecast of 2.5%. The rapidly declining price pressure speaks of a narrow range of factors influencing the price increase. The most important of these is the exchange rate of the pound, which is the primary determinant of import prices and final prices for consumer goods.
The disappearance of negative inflationary tendencies along with the movement of inflation to the target level is undoubtedly a bullish signal for the pound, so why did it lose the ground from under its feet today? As I mentioned in the review on Monday, the strengthening of the British currency by 14 percent last year became a sufficient condition to cause a reverse trend in inflation and to drive real income of the population in plus (0.5% in March in annual terms).
As can be seen from the graph, the consumer confidence index remains in the negative zone, therefore a manifestation of macroeconomic improvements can be delayed in consumer behaviour.
In addition, the deflation of the inflationary bubble is too fast what creates the risks of a deflationary trap, i.е. return to a position where measures are required to stimulate inflation. The dynamics of price growth is such that the Bank of England has real fears that it can lose the entire inflationary momentum, and further tightening of the monetary policy will only accelerate the onset of unpleasant events.
The pair of EURUSD has changed insignificantly today, as investors weigh on the economic risks of the eurozone and the political risks of the US, which so far do not give an unambiguous result. The Bank of Canada should decide today on the interest rate and the dynamics of CAD shows that investors are awaiting bullish comments from the head of the Bank of the Poloz. USDJPY is still retreating amid the fragile optimism of US indices, but this will not last long, as geopolitical tensions are still at the top of the list of investors, which should be avoided.
As for the oil market, it’s reacted positively to the API report, which reported that US stocks fell by 1M barrels to 428M. The ADE recently reported in its monthly bulletin that OPEC fulfilled the agreement by 169%, and the Kuwaiti oil minister said that the agreement on restraining production could be extended for 2019. Both grades tend to add 1 percent today, approaching the resistance of November 2014. The news background on the oil market is exceptionally favourable, given that tensions in the Middle East are still far from attenuating.
Official data from the ADE will be published today. Outside the US, oil markets generally receive support from possible supply disruptions, including the conflict in the Middle East, US sanctions on Russia and Iran, as well as a reduction in production in agonizing Venezuela.