Sterling on the front foot following UK inflation data

Sterling on the front foot following UK inflation data

Sterling is back on the front foot against the euro and dollar following yesterdays release of inflation data. The pound is trading within 0.5% of the 11-month for GBPEUR making it an opportune time for euro buyers. Cable rates (GBPUSD) have risen from the 6-week low seen on Monday and pairing is trading comfortably above the 1.27 handle at the time of writing.

Yesterday’s data confirmed core inflation remains sticky coming out at 6.9% vs expectations of 6.8%. Core inflation excludes volatile products such as food and energy and is seen as the more important reading when the Bank of England considers the impact of rising prices.

UK interest rates currently sit at 5.25% and have been rising since December 2021 when they sat at 0.1%. Sticky core inflation suggests that they will have to continue rising for the time being to bring inflation close to the BoE’s target level of 2%.

The future interest rate expectations are buoying the pounds value at the moment; however, the economy could be squeezed if interest rates stay higher for longer in the UK.

Household disposable income is likely to reduce as mortgage holders re-mortgage and rent prices rise as landlords re-mortgage at higher rates and pass on the cost increases to their tenants.

Retail sales data released tomorrow will be a key reading for the BoE and sterling exchange rates. A sharp drop-off in sales could signal that interest rates are having a negative effect on the economy and could concern the Bank. A positive reading could fuel sterling further.

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