Pound sinks as soaring inflation stokes cost-of-living concerns

Philip McHugh March 24th 2022 - 2 minute read

The pound found itself on the defensive on Wednesday, following the publication of the UK’s latest consumer price index.

Meanwhile, Sterling is trading in a narrow range so far this morning, with GBP/EUR stable at €1.2008 and GBP/USD subdued at $1.3183. GBP/CAD is rangebound at C$1.6573, while GBP/AUD and GBP/NZD hold steady at AU$1.7623 and NZ$1.8951, respectively.

Looking ahead, will some disappointing PMI releases from the Eurozone and UK weigh on the pound and euro today?

What’s been happening?

The pound got off to a poor start yesterday, on the back of a hotter-than-expected CPI print which reported domestic inflation soared from 5.5% to a 30-year high of 6.2% last month.

With the Bank of England (BoE) reluctant to continue raising interest rates, the sharp rise in inflation gave rise to fresh concerns over the UK’s cost-of-living crisis.

Applying additional pressure on Sterling was the Office for Budget Responsibility’s (OBR) growth forecast which accompanied Rishi Sunak’s Spring Statement, as it now expects the UK economy to grow 3.8% this year, versus the 6% it previously forecast in October.

The US dollar, meanwhile, strengthened on Wednesday as a souring market mood bolstered demand for the safe-haven currency.

The uptick in USD took its toll on the euro yesterday as a result of the strong negative correlation between the pairing, with the single currency coming under additional pressure after the Eurozone’s consumer confidence index plunged to a near two-year low in March.

What’s coming up?

In the spotlight today will be the latest PMI releases from both the Eurozone and UK. March’s preliminary releases will offer the first look at how both economies are faring following the outbreak of war in Ukraine.

Given the particular vulnerability of Europe’s economy to the conflict, the Eurozone release will be of particular focus. Any notable slowdown in economic activity is likely to undermine the euro.

While not as sensitive as the Eurozone to the events in Eastern Europe, the UK private sector could have also seen a slowdown in growth this month, potentially exerting some pressure on the pound.

Meanwhile the latest US durable goods release could weigh on the US dollar this afternoon, if goods orders contracted last month as forecast.

Written by
Philip McHugh

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