UK inflation has dropped below 9% for the first time in over a year. Data released yesterday confirmed CPI year-on-year is at 8.7%. The BoE have been raising interest rates for 18 months in order to bring inflation under control so the drop will be welcomed by many.
However, analysts were expecting a reduction to 8.2% which suggests the BoE have more work to do. Expectations for an interest rate hike at the next BoE meeting is now 100%. 90% probability of a 25-basis point rise, and 10% for a 50-basis point rise.
The new interest rate expectations caused the pound to surge against the euro yesterday morning. GBPEUR hit a new yearly-high at 1.1560.
In the eurozone this morning, German GDP data was much lighter than expectations. The German economy shrank last quarter and is also down year-on-year. Expectations for a recession in Germany are now rising and this could spell trouble for the single currency moving forward.
The inflation data is not all good news for sterling. Stronger inflation will continue to squeeze the pockets of businesses and consumers which in turn would reduce spending in the economy.
Could sterling strength be euro weakness?
EURUSD is the most traded currency pair globally. The pairing has dropped to a 2-month low in the last couple of days trading. Cable (GBPUSD) has dropped to a 6-week low following a resurgence in the strength of the dollar.
UK retail sales data is released tomorrow morning. A lower-than-expected reading would confirm economic activity is reducing while inflation remains embedded.
Durable goods orders and Michigan consumer sentiment will come from the US ending a busy week of economic data.
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