GBP Gains on Greek Turmoil as Deflation Avoided

The pound received a boost from inflation numbers in the United Kingdom released on Tuesday, June 16. The price of goods and services rose by 0.1 percent. The fear that the deflation experienced last month was to be permanent was broken by a small, but important growth that validates Bank of England (BoE) Governor Mark Carney that deemed it transitory. He is sure to follow on this line of thinking when he faces parliament on Tuesday, June 23 to face queries on the BoE’s Inflation Report.

While the U.K. narrowly avoided deflation, the risk remains of falling behind yet again as inflation is not due to pick up to near the central bank’s target until 2016 as per Carney. Inflation will continue at current levels, which will keep rates low in the United Kingdom until the small rebound in inflation proves to be part of an upward trend in consumer prices.

Cable has thrived under the Greek turmoil. Strong retail sales and wage growth after dodging the deflation trap has boosted the GBP/USD to seven month highs. The pound gained 2.05 percent during the week against the USD and 1.28 versus the EUR. GBP/USD had a weekly high of 1.5928, while EUR/GBP reached 0.7251. Mergers and Acquisitions activity will keep the pound bid as the Greek situation continues to add uncertainty to the market.

Monday’s Eurogroup meeting is likely to end with no agreement, but European Finance Ministers could find a way to kick the can down the road. They will have to attempt that without the International Monetary Fund that has already said will give Greece no grace period in its debt repayment obligations. The European Central Bank (ECB) has made no such threats, and its addition of emergency funds to add liquidity to Greek banks speaks of a more amicable relationship, that could result in an extension that could avoid Greece running out of cash as its financial institutions suffer major withdrawals.

Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza