Pound tumbles despite hot UK inflation figures

The pound found only fleeting gains on Wednesday, following the publication of the UK’s latest inflation figures.

Sterling is broadly flat so far this morning, with GBP/EUR stable at €1.1507 and GBP/USD dipping to $1.2340. GBP/CAD is rangebound at CA$1.6783, while GBP/AUD and GBP/NZD hold steady at AU$1.8894 and NZ$2.0274, respectively.

Looking ahead, will US debt ceiling concerns continue to bolster the US dollar today?

What’s been happening?

The pound initially jumped yesterday in reaction to the release of the UK’s consumer price index.

April’s CPI figures reported headline inflation fell back into single digits, but at a slower pace than expected, while core inflation unexpectedly spiked to a 31-year high.

The hotter-than-expected CPI figures, particularly the surprise jump in core inflation, saw the odds of a June interest rate hike from the Bank of England (BoE) surge.

However, the resulting jump in Sterling proved to be short lived as a risk-off mood undermined the increasingly risk-sensitive currency.

The US dollar strengthened in European trade yesterday as deadlocked US debt ceiling talks weighed on market sentiment and bolstered demand for the safe-haven currency.

The publication of the minutes from the Federal Reserve’s May policy meeting then tempered these gains after they proved more dovish than expected.

Meanwhile, the euro strengthened on Wednesday, despite Germany’s latest business climate index printing below forecast in May.

What’s coming up?

The start of today’s European trading session saw the publication of Germany’s latest GDP release.

The final estimate of growth in the first quarter reported a larger-than-expected contraction of growth, pressuring the euro.

This will be followed by the publication of the European Central Bank’s (ECB) annual report. Could the bank’s assessment of monetary policy in 2022 also offer some hints as to its objectives this year?

In the UK, the absence of any GBP data of note may see GBP investors look to a speech by BoE policymaker Jonathan Haskel for fresh impetus. Any hints more action may be needed in the wake of yesterday’s inflation figures could propel the pound higher.

On the other side of the Atlantic, the US will publish its own GDP figures later this afternoon.

But barring any major divergence from the preliminary estimate, the growth figures are likely to be overshadowed by debt ceiling developments. If talks remain deadlocked the US dollar may rally.