Sterling rises following UK inflation release – will the pound get stronger?

UK inflation data released this morning confirmed a rise in CPI inflation from 3.9% to 4%, causing an immediate rise in pound sterling’s value. The markets were expecting inflation to continue to drop off as it has for much of the last year.

Sticky inflation poses a threat to the prospect of interest rates being cut in the UK. The Bank of England have kept interest rates above 5% in attempt to cool down the rise in prices.

Inflation had been steadily moving closer to the BoE’s 2% target level leading to speculation that rates would be cut as early as May. The prospect of a cut in May is now much slimmer and this spells bad news for mortgage holders. However, in the interim higher for longer interest rates will support the value of the pound against its major counterparts.

A transfer of £100K is buying around €5000 and $8000 more vs the low of the last 52-weeks. Representing a clear opportunity for euro and dollar buyers.

Cable (GBPUSD) may struggle to break higher than the range we are currently in as the prospect of interest rate cuts in the US has also decreased. At the start of the week there was an 80% probability that we would see cuts in the US as early as March. This probability has shifted to 55% leading to a strengthening in the value of the dollar. EURUSD has dropped to monthly lows.

UK, US, and EU markets will be keeping a close eye on the shipping developments in the middle east. A recent study of 46 economies concluded that a doubling in shipping costs would lead to a 0.7% rise in CPI inflation.

A rise in shipping costs would affect the cost of everyday goods and potentially affect spending. This leads this week’s retail sales data with readings coming from the US and UK respectively. A drop in retail sales would support the prospect of interest rate cuts and could lead to the devaluing of either currency.

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