Pound Sterling has seen some offers following the release of a hotter-than-expected UK inflation figure for January.
Pound sterling moves higher versus its main counterparts following the release of the United Kingdom’s (UK) Consumer Price Index (CPI) data for January, which revealed that inflationary pressures intensified quicker than anticipated. The headline CPI increased by 3% for the year, above expectations of 2.8% and the December reading of 2.5%. During the same period, the core CPI, which excludes volatile components of food, energy, alcohol, and tobacco, increased by 3.7% as projected, faster than the previous measurement of 3.2%.
Month-on-month headline CPI inflation fell at a slower-than-expected rate of 0.1%, compared with 0.3% growth in December. Economists predicted headline inflation to fall at that rate this month.
Bailey of the Bank of England believes that the inflation increase will not be long-lasting.
Inflation in the services sector, which regularly monitored by Bank of England authorities, has risen to 5% from 4.4% in December.
The impact of strong inflation numbers is unlikely to be secularly favorable for the British pound. BoE officials have already stated in their most recent monetary policy statement that price pressures may rise in the short term due to increased energy prices before returning to their 2% target.
On Monday, BoE Governor Andrew Bailey stated in an interview with BusinessLine that the impact
The projected uptick in inflation will not be “persistent,” and the “gradual disinflation going on” will continue. According to Reuters, Bailey noted that a “sluggish state” of the economy also expected to “act against inflation”.
However, rising inflationary pressures are projected to limit the Bank of England’s ability to loosen monetary policy further.
Investors will now focus on the UK Retail Sales data for January and the preliminary S&P Global/CIPS Purchasing Managers Index (PMI) data for February, which will be announce on Friday.
Daily market digest: Pound Sterling climbs higher against USD; FOMC minutes in focus.
In Wednesday’s European session, the pound sterling rose to around 1.2630 against the US dollar (USD). The GBPUSD pair rises as the US dollar trades subduedly The US Dollar Index (DXY) is trading at 107.00 ahead of the release of the Federal Open Market Committee (FOMC) minutes for the January meeting, which will be published at 19:00 GMT.
Investors will look to the FOMC minutes for the January meeting for clues on how long the Federal Reserve (Fed) will keep interest rates stable in the 4.25%-4.50% range. The Fed announced a pause in its monetary expansion cycle in January, following a 100 basis point (bps) decrease in interest rates in the last three meetings of 2024. Fed Chair Jerome Powell stated that monetary policy tweaks would be acceptable when authorities saw “real progress in inflation or at least some weakness in the labor market”.
On Tuesday, San Francisco Federal Reserve Bank President Mary Daly likewise backed a “restrictive” monetary policy position unless she sees a continuation of the disinflation trend.
Meanwhile, growing fears of tariffs by US President Donald Trump may bolster the US dollar. President Trump announced on Tuesday that he intends to put 25% tariffs on imports of vehicles, semiconductors, and pharmaceuticals, which might rise further over the coming year. This could cause a downturn in the global economy.
