Inflation in the UK is now becoming a major concern and the market expectation is that the BoE will need to raise interest rates to combat mounting consumer prices. Consumer prices rose to 3.7% vs an expected 3.4% in the UK and now stand at the highest level since April last year. The forecast is that the inflation rate will remain above the Bank of England’s 3% target for the near term and that the recent VAT increase is expected to further weigh on consumer prices possibly extending inflation to a rate of more than 4% by February.

Today’s Consumer Price figures are of great significance ahead of the Bank of England’s minutes due for release on the 26th January. The BoE held interest rates at 0.5% and held QE at £200bn in their recent policy announcement last week. The insight expected to be gained from the minutes next week will be crucial for traders trying to second guess the MPC’s monetary policy for this year. The BoE have a very difficult balancing act in hand as any increase in interest rates could cripple UK exports and push the economy back into a recession.

GDP growth in 2011 is expected to be just 2.3% and in 2012 the expectation is that this will rise moderately to 2.8%. House prices are expected to fall 5% in 2011and remain stable in 2012 with little growth forecast. Unemployment is set to rise to 8.1% and the expectations is that these poor forecasted figures will weigh on the pound with shaky sentiment and great uncertainty surrounding the markets at present.

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Best Regards
Luke Zorab
Torfx Currency Dealer

“Any opinions expressed in this document are those of TorFX analysts. Any analysis and/or forecasts provided are aimed at helping clients understand market conditions and developing trends. Clients are wholly responsible for their own trading decisions.”