The pound was full of vigour on Wednesday morning, advancing to 1.3282 against the dollar – its highest level in more than a week – after official data showed UK inflation accelerated to a decade high, stoking expectations of a rate hike in February.
Data released by the Office for National Statistics showed British inflation shot up to its highest level in more than 10 years last month, jumping to 5.1% from 4.2% in October, exceeding economists’ forecasts who had predicted a rise of 4.7%.
The consumer price data came hot on the heels of an annual report on Britain’s economy by the International Monetary Fund (IMF), in which it urged the Bank of England (BoE) to avoid an “inaction bias” regarding raising interest rates.
The IMF forecast British consumer prices would reach a 30-year high of around 5.5% next year. If their projection becomes reality, the pressure will build on the BoE to return inflation to its 2% target by hiking interest rates – assuming the central bank doesn’t raise borrowing costs later today amid Omicron-fuelled uncertainty.
Dollar boosted by Fed policy statement
The dollar remained firm on Wednesday as the US Federal Reserve prepared to deliver details of its two-day meeting of policy-setters and investors waited to see if the central bank would underpin market expectations for rate hikes in 2022.
Market participants have been placing bets on the Fed ending its bond-buying programme around March, which would pave the way for one or maybe two rate hikes next year.
The dollar was bolstered later in the day when the Federal Open Market Committee met expectations by saying it would end its pandemic-era bond purchases in March, opening the door to three quarter-percentage-point interest rate increases in the coming months.
By this morning, GBP USD was in the 1.32 mid-range have briefly dipped below the benchmark following the Fed’s comments
The BoE resisted a widely expected interest rate rise in November due to uncertainty surrounding the end of the government’s job furlough programme. The central bank is expected to maintain its dovish stance today amid the spread of the Omicron coronavirus variant – despite surging inflation. The minutes from the central bank’s December meeting follow the publication of the Markit services PMI and the Markit manufacturing PMI – both for December.
A slew of notable data sets are scheduled for release from the US economy today: building permits, housing starts, initial jobless claims, the Philadelphia Fed manufacturing survey, and the Markit PMI composite.