Pound rebounds following lighter than expected inflation figures

Wednesday’s trading session saw the pound on the front foot, gaining back some of the losses from the past week against a basket of currencies. Inflation data released in the morning showed price growth slowed in July for the first time since September 2021. Could this be a signal that the cost-of-living crisis has begun to ease in the UK?

The Bank of England stated last month that they expect inflation to peak at 13%. The drop in price growth does pose an interesting question for the Bank with many in the market expecting a 75basis point hike at next Thursday’s meeting. A lighter than expected 50basis interest rate hike could pile pressure on the pound.

GBPEUR fell sharply last week after the bank suggested they needed to be cautious not to raise rates too aggressively.

GBPEUR almost broke the 1.16 handle at the peak of the day, the highest rate seen since last Wednesday. The pound also saw gains against the Swiss Franc, Aussie dollar and Kiwi dollar. Cable rates (GBPUSD) rose during the day, however, the pairing remains trading within a cent of the lowest levels seen since 1985. Selling $200K, currently buys £7000 more than a month ago.

The US Federal Reserve has its next interest rate decision on Wednesday and many will be watching for whether they opt for a 75basis or 50basis point hike. A 50basis point hike could provide further respite for the pound with a 75basis point hike compounding further downward pressure.

EU to impose a windfall tax on energy firms

Yesterday the European Commission announced that they intend to impose a windfall tax on energy companies in order to raise more than 140 billion euros (£121 billion).

The funds raised will help pay for tax cuts and price caps already in place across Europe. The UK government recently announced its own energy bill price cap but instead of imposing a windfall tax on energy firms to cover the cost, the government will compensate energy firms to protect profits.

This is likely cost more than £100 billion. Could the debt-financed price cap cause problems for the pound in the future? Taxpayers may have to bear the brunt as the national debt level is increased in line with interest rates.

The pound has opened the day slightly softer. in early morning trading There is little economic data coming out of the UK due to the Bank Of England postponing its interest rate decision until next Thursday, but we will see the latest retail sales and jobs data from the US. Weaker than expected data here could boost the pound against the dollar.

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