The pound strengthened after the release of strong UK inflation data on Wednesday morning 7am (UK time). According to the Office for National Statistics, inflation dropped to 10.1% in March as the cost-of-living crisis eased slightly, but is still higher than the 9.8% expected by economists.
In other words, inflation has remained elevated and in double-digit levels for the last 7 months (since August when inflation was 9.9%). On a monthly basis, the CPI inflation rate rose by 0.8% in March.
With the positive UK inflation data, investors are optimistic that the Bank of England (BoE) will accelerate its rate hike cycle.
Lower petrol and diesel prices pull inflation down
The ONS reported that motor fuel prices fell by 5.9% in the year to March 2023 when compared with February’s 4.6% increase. Petrol prices fell by 1.2p per litre between February and March 2023, while diesel prices fell by 3p per litre during March, to 166.5p per litre.
On the other hand, transport services and second-hand car prices increased between February and March 2023. Overall, the annual inflation rate for transport dropped from 3.1% in February 2023 to 1.0% in March 2023, marking the ninth consecutive monthly fall since June 2022.
Bank of England
The Bank of England’s goal is to keep inflation at the official 2% target, and the central bank expects further falls over the coming months as the impact of Russia’s invasion of Ukraine eases off.
Bank of England officials fear that core inflation (excluding food and energy) will be harder to bring down than the headline rate. While there isn’t a target for core inflation, MPC members see it as a substitute for domestic price pressures. For example, the annual cost of living increased to 6.2% from 5.8% in March.
Former MPC member Andrew Sentance said on Tuesday the Bank was partly responsible for high inflation due to its prolonged quantitative easing programme. UK inflation is expected to remain much higher than in the US and the Eurozone.
Commenting on today’s inflation figures, Chancellor Jeremy Hunt noted that “These figures reaffirm exactly why we must continue with our efforts to drive down inflation so we can ease pressure on families and businesses. We are on track to do this – with the OBR (Office for Budget Responsibility) forecasting we will halve inflation this year – and we’ll continue supporting people with cost-of-living support worth an average of £3,300 per household over this year and last, funded through windfall taxes on energy profits.”
Apart from the upbeat inflation data, the pound was also boosted by the news that the European Union (EU) will allow fewer border checks and provide further Brexit incentives. At the same time, the pound could face challenges due to the UK PM Rishi Sunak’s political struggle and declining housing prices in London.
In terms of further risks for the currency pair, we would like to note the UK’s warning that Russian hackers want to destroy Western critical infrastructure and concerns regarding the US-China tension following the US House China Committee’s discussion about the Taiwan invasion scenario.
Additionally, the indecision about the US debt ceiling due to US President Joe Biden’s reluctance to lift limits and news that China was involved in the Russia-Ukraine war could create further challenges to the GBP/USD price.
The latest positive US economic data and upbeat comments by Fed officials suggest a 0.25% Fed rate hike in May. Investors will now focus on the Fed’s Beige Book and Friday’s UK Retail Sales and the US S&P Global PMIs for further direction for the GBP/USD pair.
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