Pound trades erratically as UK inflation hits new 40-year high

The pound fluctuated on Wednesday as markets reacted to the UK’s latest consumer price index.

Sterling is struggling to find purchase this morning, with GBP/EUR subdued at €1.1575 and GBP/USD muted at $1.2233. GBP/CAD is rangebound at C$1.5857, while GBP/AUD and GBP/NZD hold steady at AU$1.7741 and NZ$1.9521, respectively.

The release of the Eurozone and UK PMIs will be in focus for markets today. Could a sharper-than-expected drop in private sector growth take their toll on their respective currencies?

What’s been happening?

The pound initially tumbled on Wednesday in response to the UK’s latest CPI figures. A modest acceleration of inflation prompted some GBP investors to pare back their Bank of England (BoE) rate hike bets.

However, Sterling was able to bounce back through the latter half of the session thanks to an improvement in market sentiment.

The US dollar, meanwhile, opened yesterday’s session on strong footing amidst a prevailing risk-off mood.

But the ‘greenback’ quickly shed these gains as risk appetite improved and after Federal Reserve Chair Jerome Powell struck a cautious tone in his testimony before Congress.

This downturn in the US dollar helped to bolster the euro as a result of the strong negative correlation between the pairing.

Aiding the euro’s ascent were comments from European Central Bank (ECB) policymaker Olli Rehn, who suggested it is ‘it is very likely’ that the September rate hike will be bigger than 25 bps.

What’s coming up?

Turing to today’s session the primary focus is likely to be the publication of the latest PMI releases from the Eurozone and UK.

Up first will be the Eurozone releases, with the euro potentially firming if they report activity in the bloc’s manufacturing and services sectors held steady this month.

Meanwhile, the UK’s preliminary PMIs are expected to report activity in the UK’s manufacturing and service sectors continued to slow in June, having previously struck multi-month lows in May.

Powell’s testimony will continue today, potentially inspiring more losses in the US dollar unless he strikes a more hawkish tone.

Elsewhere USD exchange rates may also be driven by the latest US PMIs. While the S&P releases aren’t as influential as the ISM figures, the ‘greenback’ could still weaken if the US services index declines for a fourth consecutive month.