GBP wobbles as UK inflation approaches six-year high

Sterling was in uncertain territory yesterday after UK inflation unexpectedly strengthened, but the odds of the Bank of England (BoE) responding with a further interest rate hike remain slim.

The pound is on weak form this morning. GBP/EUR is flat at €1.1345, with GBP/USD also stuck at opening levels at US$1.3323. GBP/AUD has fallen -0.2% to AU$1.7599 and GBP/NZD has weakened by a commensurate amount to NZ$1.9168. GBP/CAD has slipped marginally lower to C$1.7129.

Wage growth figures are set for release today, which could weaken the pound if pay growth remains sluggish.

Meanwhile, even though the Federal Reserve is expected to hike interest rates today, that may not be enough to boost the US dollar. Read on to find out why…

What’s been happening?

The pound put on an unsteady performance yesterday, ending the day higher versus the euro but lower against the US dollar.

The latest UK inflation figures caused some confusion, after showing that price growth had unexpectedly climbed to a near six-year high of 3.1% during November.

How the Bank of England is likely to react to this remains unclear - policymakers have only just voted to hike interest rates for the first time in a decade, so it seems unlikely that the additional 10 basis points of inflation will prompt more monetary tightening.

At the same time, if this is a sign that inflation hasn’t peaked (which could be the case given that other data suggests manufacturers and retailers continue to face rising input costs) then the BoE may have no choice but to increase borrowing costs again.

Also troubling Sterling is a developing spat between Brexit secretary David Davis and the EU, after the former claimed over the weekend that the 11th hour deal struck on Friday regarding the Irish border, citizens’ rights, and the Brexit divorce bill was more a ‘statement of intent’ rather than something legally enforceable.

Meanwhile the proximity of this evening’s Federal Reserve monetary policy decisions weighed on both the euro and US dollar.

GBP/EUR was able to climb thanks to disappointing scores from the latest ZEW sentiment surveys, which largely showed a weakening outlook amongst institutional investors and financial analysts.

Meanwhile, with a 0.25% rate hike as good as guaranteed today, markets were thinking more long-term about the US monetary policy outlook, so an above-forecast rise in the NFIB small business optimism index helped push GBP/USD lower.

What's coming up?

After yesterday’s strong inflation figures, markets will be keenly awaiting today’s UK wage growth reports.

If wage growth remains sluggish, this indicates that accelerating price growth will continue to squeeze household budgets, which doesn’t bode well for the spending-driven economy.

Meanwhile both the euro and US dollar are likely to be trapped in a narrow range due to today’s scheduled monetary policy meeting announcements from the Federal Open Market Committee (FOMC).

Even today’s US consumer price index figures may have little impact.

With markets looking to the long-term, USD appreciation relies upon the Fed delivering a ‘hawkish hike’, where it raises borrowing costs and also signals that further tightening will follow in 2018.

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.