GBP/USD: BoE is likely to look through upside risk to inflation - Scotiabank

Eric Theoret, Strategist at Scotiabank, notes that they are skeptical of the FX response to stronger-than-expected UK CPI data,  as the BoE is likely to look through upside risk to inflation on the basis of transitory factors.

Key quotes

“GBP is up  vs. the USD, its first material gain since August 2nd with strength provided by the release of stronger than expected CPI data for July. Headline CPI exceeded expectations of 0.5% y/y to print 0.6%, its highest level since late 2014.”

“We are skeptical of the FX response as we suspect that the BoE is likely to look through upside risk to inflation on the basis of transitory factors. This week’s larger domestic events take place on Wednesday and Thursday with the release of employment and retail sales.”

“In terms of sentiment, measures of implied GBP volatility are low and risk reversals are showing signs of stabilization with a modest premium for protection against GBP weakness.”