UK inflation remains high – will the BoE give the pound a boost?
Economic data released yesterday shows UK inflation (CPI) remains elevated above 10.1%. Forecasters were expecting inflation to fall to 9.8% following last month’s reading of 10.4%. The inflation reduction is positive for the UK and was largely driven by a fall in fuel and oil prices. However, food prices continue to rise as the UK consumer feels the squeeze of the continuing cost of living crisis.
Sterling exchange rates have remained relatively unchanged following the release of data, GBPEUR is trading within the 1.13 bracket and cable (GBPUSD) is within the 1.24 handle. These are levels we have become accustomed to over the past couple of weeks.
The latest inflation reading has meant expectations for further interest hikes from the Bank of England have increased. This is likely supporting the value of the pound against the euro and the dollar. Inflation remains elevated in the Eurozone at 5.7%, which was forecast prior to yesterdays release.
Although, Eurozone inflation is significantly lower than the UK, the European Central Bank remain committed to bring inflation down. Several members have suggested further interest rate hikes are to be expected. The bullish approach from the ECB is supporting the euro against its major counterparts. EURUSD is trading within range of the yearly-high.
In the short term, markets will have their eyes on tomorrows release of UK retail sales, and the UK and EU release of manufacturing and services PMI. PMI data measures whether certain sectors are expanding or contracting and can cause currency volatility.
The BoE will be watching closely for any positive or less than negative retail sales and PMI data. If the data suggests that the UK economy is struggling, the bank may think twice about raising rates too high. They will not want to cool down the economy too aggressively with their interest rate hikes as this presents the danger of the UK falling into recession. GBPEUR fell into the 1.05s during the last recession.
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