Retail sales out of the UK were reported today. The British Pound rallied after the release of this report which pointed towards a much stronger UK consumer. Retail sales rose by 1.8% in April on a monthly comparison for an annualized increase of 7.7% which was far better than expectations which called for an increase of 0.5% and 5.2%. Adding to the bullish tone were upward revisions to March in order to reflect a monthly increase of 0.1% and 4.9%.
The strength in consumer activity has also lead to an increase in inflationary pressures which were reflected in yesterday’s CPI report. Inflation rose 0.4% in April for an annualized increase of 1.8%. The annualized core CPI increased by 2.0%. The Bank of England has an upper ceiling for inflation which is capped at 2.0%. Anything above this level for an extended period of time could force the MPC to act by increasing interest rates.
In addition to an increase in interest rates the UK economy has provided plenty of data which would allow the Bank of England to reduce its economic stimulus which should further boost the British Pound. Forex traders should remember that the UK economy was assisted by monetary policy and stimulus introduced by the Bank of England which at some point needs to come to a complete end.
Once stimulus has been entirely removed the Bank of England needs to unwind those assets which could result in future economic problems and could reverse course entirely for the British Pound. For now it appears as if the GBPUSD will attempt to test the 1.7000 mark from where the most recent correction took place.
Forex traders should be careful as price action could be very volatile and any current move higher may face several attempts of profit taking which could push the British Pound lower. Sideways trading between 1.6800 and 1.7000 for several weeks should also be accounted for as the British currency may find it difficult to breakout over the summer months.