Sterling Pops Despite In Line CPI

Sterling popped modestly higher on the back of some relatively in line inflation data earlier this morning, which prompted verbal action from the head of the Bank of England, as well as the Chancellor of the Exchequer.

According to the ONS, UK CPI fell 0.2% month-over-month in January, further than calls for a 0.1% decline and reversing a 0.6% contraction in December. Annual CPI was up 3.5%, in line with expectations and faster than the prior 2.9% pickup.

As usual, the results have prompted the central bank government to write a letter to the Chancellor of the Exchequer explaining why inflation was above the 3.0% threshold, however, this was also expected by the markets.

In the letter, BOE Governor Mervyn King said the jump in inflation is expected to disappear as slack in the economy brings down prices.

The comments are in line with warnings from the Bank of England which predicted a temporary spike in inflation in the region.

Responding King's letter, UK Chancellor Alistair Darling said he agrees that inflation in the UK will decline, and that the central bank's economic outlook remains consistent with that of the Federal government.

Although in theory the data was priced into the markets, GBP/USD nevertheless added 18 pips to 1.5707 before retracing the moves.

So far today, the pair had traded in a range of 1.5654 to 1.5730. Short term resistance lies at 1.5765 with support at 1.5560. With this morning's CPI report in line, the gains in the pound are also being driven by a decline in risk aversion worldwide.