The knee-jerk reaction over the past few months has been to equate higher inflation with more aggressive central banks. But amid the recent subtle shifts by the Fed, RBA, and BOE, it is clear we are now into the second-half of the tightening cycle where the previous rules stop applying.
As the tightening cycle reaches a stage where it is slowing down considering that economic conditions are worsening, higher inflation can work as a double-edged sword in some sense.
There is a balance that needs to be struck between central banks continuing to throw everything to douse the fire and central banks needing to back off as the economy is set to run head first into the ground. Policymakers want to achieve a 'soft landing' and that won't be helped by further aggressive rate hikes as the economy grinds towards a recession.
In the case of the UK, they are arguably one of the worst hit economies by all this amid a worsening cost-of-living crisis and high energy prices - not helped by the spillover impact from the Russia-Ukraine conflict.
As much as the over 10% print is likely to vindicate another rate hike by the BOE, I don't see that as being as much of a game changer as compared to the weight of such a figure on consumer sentiment.
In other words, markets are comfortable with this as it fits with rates pricing for the BOE but the adverse impact on the economy from the data has more potential to threaten to derail the central bank from its tightening path instead. As mentioned earlier:
"As much as this vindicates more rate hikes by the BOE, I don't see much upside to that considering that markets are well prepared for what the BOE has to offer in the months ahead. Instead, if the staggering weight of inflation crushes consumption activity, I can see this print being worked to be a negative for the pound instead."
For GBP/USD, key support continues to hold closer to 1.2000 for now while topside momentum is very much limited by the trendline resistance at 1.2192 currently.
