Pound stumbles as weak inflation raises doubts over BoE rate hike

Philip McHugh September 21st 2023 - 2 minute read

The pound retreated on Wednesday, after Bank of England (BoE) interest rate expectations were rocked by the UK’s latest inflation figures.

Sterling is mostly rangebound so far this morning, with GBP/EUR flat at €1.1575 and GBP/USD stable at $1.2324. GBP/CAD is steady at CA$1.6631, while GBP/AUD and GBP/NZD tick up to AU$1.9214 and NZ$2.0853, respectively.

Coming up, the pound could face heavy selling pressure this afternoon if the BoE opts to leave interest rates on hold.

What’s been happening?

The pound stumbled during yesterday’s session, with GBP/USD slumping to a four-month low and GBP/EUR striking its worst level in six weeks.

This followed the publication of a weaker-than-expected UK consumer price index. August’s CPI figures reported domestic inflation unexpectedly fell from 6.8% to 6.7%, missing forecasts it would rise to 7%, while core inflation plummeted from 6.9% to 6.2%. 

Sterling slumped as the weak inflation figures undermined expectations for a Bank of England interest rate hike later today.

Meanwhile, the US dollar was subdued during the European session on Wednesday as investors awaited the publication of the Federal Reserve’s latest interest rate decision.

USD exchange rates then jumped as the US central bank kept interest rates on hold, but left the door open to one more rate hike in 2023 and signalled rates would remain above 5% in 2024.

At the same time, the euro was able to tick higher yesterday, mostly on the back of its negative correlation with the US dollar.

What’s coming up?

The BoE will have its turn in the spotlight today, when the bank announces its latest interest rate decision at noon.

If the bank opts to leave interest rates on hold the pound is likely to tumble. But even if the BoE raises rates, Sterling could fall if the bank also signals that borrowing costs have now peaked.

For USD investors the focus will be on the latest US jobless claims. If new claims remain low, it could bolster the US dollar this afternoon.

Finally, a speech by European Central Bank (ECB) President Christine Lagarde will be closely watched by EUR investors as they seek to judge whether the ECB’s hiking cycle is truly over.

Written by
Philip McHugh

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