Pound bounces on inflation report (video)

Today the Bank of England delivered their quarterly inflation report and confirmed that they will look through a temporary fall in inflation, with the expectation that inflation would rise quickly by the end of the year. It was added that markets had got ahead of themselves by expecting no move on interest rates until late 2016 – suggesting that hikes could come sooner. At the same time the door has also been opened for a potential cut in interest rates if warranted. This has been a trend recently with the Reserve Bank of Australia and the Bank of Canada, both cutting rates unexpectedly. Overall the pound reacted positively to the news given the longer term outlook on inflation and the increase in growth expectations. In addition the overall feedback from the BoE is that the next move in interest rates would be up and not down as they view the fall in inflation as temporary. It has been a rollercoaster ride for the pound as the markets try and read into the momentum in the UK economy and the timeline to interest rate hikes.

We will also get feedback from the US economy with retail sales due later today. It is expected to be a positive report following a disappointing number in December. The view is that consumers will be benefiting from the fall in oil prices and low interest rates. If good news today the USD could benefit further as the feedback would complement the solid labor market report received on Friday last week.

Another risk event for today will focus on the EU summit in which both Greece and Russia will be the main topics. The talks follow the failed Euro group meeting yesterday as we move closer to a crunch point at the end of this month for Greece.

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