Having initially dropped lower, the pound rebounded to near a one-month high on Wednesday after investors concluded that a dip in September inflation was unlikely to prevent the Bank of England (BoE) from hiking interest rates soon.
Consumer prices rose 3.1% in annual terms, easing back from 3.2% in August, and missing the consensus that inflation would hold steady, data from the Office for National Statistics showed. Core inflation grew by 2.9% year-over-year compared to analysts’ consensus of 3%.
The Retail Price Index increased by 0.4% month-over-month in September, surpassing the consensus of 0.2% growth. On a year-over-year basis, the index jumped by 4.9%.
The BoE believes inflation will exceed 4% before the end of the year – and some market analysts are forecasting even higher rates in 2022. Therefore, investors feel it will take more than a dip in consumer prices to prevent central bank policymakers from raising rates – possibly as early as next month.
The pound rebounded above 1.38 against the dollar, having broken through the resistance level for the first time in over a month on Tuesday.
This morning, the GBP USD rate remained above the benchmark, having touched its highest level since 16 September overnight.
US rate hike expectations soften
The dollar was dragged lower on Wednesday by improving risk sentiment that was prompted by rising commodity prices and interest rate expectations.
The US currency was on firmer footing last week as market participants raised bets that the Federal Reserve will hike rates sooner than expected to tackle inflation.
Those bets have been scaled back, however, with investors anticipating even more substantial rate rises in other countries – including the UK.
Two-year Treasury yields retreated sharply overnight, also causing bets for Fed rate hikes to fade.
On Wednesday, Federal Reserve Governor Randal Quarles said that while it’s time for the central bank to begin tapering its bond-buying programme, it would be “premature” to start hiking interest rates amid hot inflation that is likely to ease next year.
In remarks prepared for delivery to the Milken Institute, Quarles said: “It is clear that we have met the test of substantial further progress toward both our employment and our inflation mandates, and I would support a decision at our November meeting to start reducing these purchases and complete that process by the middle of next year,”
Two influential data sets are scheduled for release from the US economy today: the Philadelphia Fed Manufacturing Survey for October and Initial Jobless Claims for the week ended 15 October.
The GfK Group Consumer Confidence Index is slated for release in the UK overnight, which is swiftly followed by Retail Sales, the Markit Manufacturing PMI, and the Markit Services PMI on Friday morning.