Pound drops to 5-week low on UK inflation concerns

Accelerating UK inflation left the pound fluctuating on Tuesday, with the currency first climbing and then falling against most of its rivals.

GBP/EUR dropped from €1.1732 to a five-week low of €1.1620, GBP/USD eased from $1.2943 to $1.2874, GBP/AUD fluctuated between AU$1.7343 and AU$1.7446 and GBP/NZD slid from NZ$1.8805 to NZ$1.8667. GBP/CAD closed the day little changed at C$1.7586.

Can UK wage data help the pound recover? Keep scrolling to find out…

What’s been happening?

Yesterday’s UK inflation report showed that consumer price pressures accelerated to a new three-and-a-half year high of 2.7% in April – beating forecasts for a reading of 2.6%.

As the Bank of England (BoE) made it clear last week that it’s willing to look through higher inflation for the time being, the result did nothing to boost rate hike expectations.

Concerns that higher inflation (in conjunction with sluggish wage growth) will restrain consumer spending and weigh on UK economic output left the pound weaker on Tuesday.

GBP/EUR slumped to its worst level in five weeks after losing almost a cent.

The pound was able to largely recoup losses against the US dollar however as a new scandal involving President Donald Trump and Russia left people wary of USD.

While the UK’s inflation data was the main cause of pound movement on Tuesday, GBP/NZD also fluctuated in response to the latest GlobalDairyTrade auction, where the price of New Zealand’s key commodity increased 3.2%.

What’s coming up?

In light of yesterday’s inflation report and the Bank of England’s (BoE) recent commentary about wage growth, today’s UK average earnings figures will be of particular importance.

Average weekly earnings including bonuses are believed to be up 2.4% on the year in March, an improvement on February’s figure of 2.3% but still considerably lower than the current rate of inflation.

Growth in earnings excluding bonuses is believed to have eased from 2.2% to 2.1% during the same period.

If the results meet or come in below forecast, the pound could extend Tuesday’s losses on fears that a drop off in consumer spending will damage the UK’s growth outlook. However, if wage growth beats expectations the report could give Sterling the burst of momentum it needs to recover lost ground. The UK’s unemployment rate is forecast to hold at 4.7%, with the nation adding 21k jobs.

Final Eurozone inflation data may also inspire GBP/EUR movement. As easing price pressures in the currency bloc would reduce the odds of the European Central Bank (ECB) adjusting interest rates anytime soon, a slower rate of inflation would be euro-negative.

We’re here to talk currency whenever you need us, so get in touch if you want to know more about the latest news or how it could impact your currency transfers.

Phil McHugh,
Trading Floor Manager

Phil provides dealing and hedging services whilst also helping to manage Currencies Direct overall market exposure.