Pound firms on hotter-than-expected UK inflation

Philip McHugh October 19th 2023 - 2 minute read

The pound edged higher on Wednesday, after the UK’s latest inflation figures printed above expectations.

Sterling is mostly muted so far this morning, with GBP/EUR flat at €1.1514 and GBP/USD subdued at $1.2134. GBP/CAD is rangebound at CA$1.6651, while GBP/AUD and GBP/NZD climb to AU$1.9229 and NZ$2.0808, respectively.

A speech by Federal Reserve Chair Jerome Powell will be in the spotlight today, amid growing uncertainty over the bank’s monetary policy.

What’s been happening?

The pound trended broadly higher during yesterday’s session in the wake of the UK’s consumer price index.

Sterling firmed as September’s CPI figures showed that headline inflation in the UK held at 6.7%, against expectations it would slow to 6.6%. While core inflation decelerated from 6.2% to 6.1%, missing forecasts for a drop to 6%.

However, analysts suggested the inflation figures were unlikely to encourage the Bank of England (BoE) to raise interest rates in November, which capped the pound’s gains.

The US dollar also firmed on Wednesday, with the safe-haven currency attracting support as market risk appetite soured.

Meanwhile, the euro was placed on the defensive yesterday, as it was pressured by a stronger US dollar and confirmation that Eurozone inflation slowed dramatically in September.

What’s coming up?

Looking ahead, Federal Reserve Chair Jerome Powell will speak later this afternoon.

USD investors are hoping he will provide more insight into the Fed’s plans for interest rates, amid some mixed messaging from policymakers in recent weeks. If Powell hints that the US central bank is likely to adopt a more wait-and-see approach to monetary policy the US dollar may drop.

In the meantime, risk-off flows, amid escalating tensions in the Middle East, are likely to underpin demand for the ‘greenback’.

In the UK the absence of any notable economic data may lead to the pound being driven primarily by market risk dynamics, with Sterling potentially faltering if investor sentiment deteriorates.

At the same time, limited Eurozone data will likely see movement in the euro being tied to its negative correlation with the US dollar, potentially allowing EUR exchange rates to climb if USD exchange rates fall.

Written by
Philip McHugh

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