Strong UK inflation data boosts pound on increased rate hike odds

The odds of a UK interest rate hike this year were boosted by strong inflation data yesterday, pushing GBP higher.

The pound has softened this morning however. GBP/EUR is flat at €1.1233, as is GBP/USD at US$1.3894. GBP/AUD is also stuck around opening levels at AU$1.7651, GBP/NZD has fallen -0.3% to NZ$1.9012, and GBP/CAD is also flat at C$1.7482.

Read on to see what the pound will have to react to today from the global data calendar, and why USD could be set to rise regardless of whether today’s US eco-stats perform well or poorly…

What’s been happening?

Pound Sterling received a boost yesterday after the inflation figures for January showed a sharper-than-expected pace of consumer price growth.

Year-on-year, overall consumer prices held steady at 3%, instead of dipping to 2.9% as economists had predicted.

Meanwhile, core consumer prices - which remove the impact of volatile energy and food prices from the overall reading - saw accelerated growth to 2.7%, beating forecasts by 10 basis points.

GBP exchange rates climbed higher, with many analysts stating that this strong price growth puts further pressure on the Bank of England (BoE) to hike interest rates at least once this year.

However, despite the strength seen in the pound elsewhere, the GBP/EUR exchange rate was stuck marginally below opening levels during yesterday’s session.

This is because markets were expecting strong results from today’s slew of Eurozone GDP data and weakness from today’s US data, meaning it is likely the euro will climb higher today; there was therefore little point in selling it as far as the markets were concerned.

GBP/USD recorded solid gains, after Federal Reserve official Loretta Mester claimed that interest rates should rise at a pace similar to that seen in 2017.

This would mean another three rate hikes, rather than the four markets had begun to hope may be delivered.

What's coming up?

There is no UK data on the economic calendar today so, barring the emergence of a new Brexit development, Sterling will be left to react to strength or weakness in its major peers.

There could still be plenty of volatility, however, given the number of top-tier data releases scheduled for publication today.

Fourth-quarter German GDP has already been published, but it will be followed soon by Italian and Eurozone quarterly growth figures, as well as December’s industrial production figures for the currency bloc.

Economists are predicting a solid showing, which will only firm confidence in the Eurozone and the single currency.

Meanwhile, US inflation and advance retail sales figures for January are expected to weaken on previous readings.

This means the US dollar could be set to weaken today although, on the other hand, softening inflation figures could relax the panicking stock markets and give investors the confidence to move back out of the ultra-safe Japanese yen and buy USD again.

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.

Reaz Rahman
Senior Dealer

Reaz, our Senior Currency Dealer, joined us in January 2015. Reaz draws on his detailed knowledge of the foreign exchange markets to help customers to choose the right service and time to transfer.