Sterling softens following fall in UK inflation – where will the pound go next?

Sterling softens following fall in UK inflation – where will the pound go next?

UK inflation data released yesterday morning caused a large scale sell-off of the pound. GBPEUR had climbed to two-week highs prior to the announcement and cable was back trading in the 1.21 handle. However, both pairings are trading more than a cent lower at the open this morning.

Inflation figures revealed a fall in both CPI (Consumer Price Index) and core CPI data. The headline figure fell from 10.5% to 10.1% vs expectations of 10.3%. While the core number reduced from 6.3% to 5.8% vs expectations of 6.2%.

What does this mean for Sterling’s value?

The better than expected fall in inflation will provide relief to the Bank of England that their current rate hike cycle is starting to have an impact on inflation. The bank have been raising interest rates for more than a year now to combat rampant inflation that remains close to a 40-year high.

If inflation was higher or equal to expectations then Andrew Bailey and the other MPC (monetary policy committee) members would have been under pressure to continue the current rate hike cycle.

The fall in inflation may cause a shift in the Banks current policy which would be negative for the pound. Strong retail sales data yesterday from the US has opened the door for further hikes in the US. Interest rates are likely to continue to rise in both the US and Eurozone which will boost the value of their currencies and weigh on the value of the pound.

Chief economist for the BoE Huw Pill is speaking later today and markets will look for any information given regarding future policy. Retail sales data is released in the morning and the expectation is for an improvement from last month reading of -1% to -0.3%.

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