Pound Sterling Today: GBP Gains as UK Inflation Higher than Expected

April 17, 2024 - Written by Ben Hughes

STORY LINK Pound Sterling Today: GBP Gains as UK Inflation Higher than Expected

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A lull in geopolitics and the Iran/Israel conflict has allowed markets to re-focus on the other main theme – inflation and central bank plans to cut rates. Tuesday’s session brought a raft of central bank speakers and Fed Chair Powell finally admitted a lack of further progress on inflation and a delay to cuts.

“The recent data have clearly not given us greater confidence and instead indicate that is likely to take longer than expected to achieve that confidence,” Powell said at the Wilson Center in Washington.

“Given the strength of the labor market and progress on inflation so far, it is appropriate to allow restrictive policy further time to work and let the data and the evolving outlook guide us,” he continued.

The market response was fairly tame, but expectations have already adjusted since last week’s inflation report and a first hike is now expected in September rather than June. The US dollar did make new 2024 highs on Tuesday but with slow and steady gains rather than a large move higher.

The Bank of England’s Governor Bailey was also speaking on Tuesday but said very little on the bank's plans to cut rates. Instead, he highlighted “very encouraging signs” on the world economy and progress on disinflation. Perhaps he was waiting for Wednesday’s CPI release before making any more hints at the timing of a cut, and judging by the data this week, he is likely to sit on the fence and hold rates steady for now as there are too many hurdles still in the way.

CPI Disinflation Slows

Wednesday’s CPI data likely put an end to any chance of a June cut by the BoE. Headline inflation slowed to 3.2%, but this was slightly higher than the expected 3.1%. Core CPI also beat expectations with a 4.2% print.

“While key measures of inflation declined from February, services CPI – which is what the Bank of England is mostly looking at – only slowed from 6.1% to 6.0%, against consensus and the BoE itself projections for 5.8%,” note ING.

Taken in conjunction with Tuesday’s employment data which showed sticky wage growth readings, the case for an early cut looks flimsy. Sterling has strengthened slightly and is firmer against the Euro, pushing EURGBP to 0.852 on Wednesday. 0.850 is solid support but the pair cannot seem to distance itself from that level and could be setting up a break lower. However, uncertainty may limit the downside for now. April’s readings on wage growth, inflation, and especially services inflation will be crucial and could still open the door for a cut.

“...next month’s figures are crucial since April is when we get a load of annual price hikes across the service sector in the UK, and last year, this was a source of big upward surprise,” continued ING.

The April readings will likely cement a June cut or push it back to August, which could then help the Pound push EURGBP through 0.850 support. This means the pair could remain rangebound between 0.85 and 0.87 for another month.

GBPUSD, on the other hand, is dropping sharply on dollar strength and Powell’s pivot on Tuesday could mean the dollar continues its rally towards the 2023 high. Yields are also rising and the 10Y yield has broken above 4.5% and could reach the 5% peak again. Economic weakness would undo the dollar move as it would give the Fed an incentive to cut, but so far this year, the US economy has gone from strength to strength.

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TAGS: Pound Sterling Forecasts