Home Daily Commentaries Sterling strengthens as inflation rate climbs to 4%

Sterling strengthens as inflation rate climbs to 4%

Wednesday 17 January, 2024

Daily Currency Update

November saw wage growth slowing and the unemployment rate remaining at 4.2%. It is likely wage growth will continue at low momentum while the Bank of England considers any interest rate cut before the middle of this year.

Markets expect the Bank of England to possibly cut interest rates by 131 basis points this year with the first 25 pips in May.

In the Eurozone Germany’s inflation rose to 3.7% in December from a print of 3.2% in November. Many ECB officials have been saying that this data suggests that there will be no rate cuts anytime soon and that they will remain high “as long as is required”.
The Euro fell as markets saw low economic activity against persistently high inflation leaving Central Banks in a quandary.

Higher Treasury yields in the US supported the Dollar coupled with markets reducing expectations for the Federal Reserve to cut rates in March of this year. Fed Governor, Christopher Waller, said that the Fed does not need to ease rates as quickly as markets expect and that they will proceed with caution.

 

Key Movers

This morning saw the release of UK inflation which rose to 4% for the full year in 2023. This will further complicate interest rate expectations for the Monetary Policy Committee (MPC) while trying to balance economic growth with persistently high inflation. Since the data release, sterling has strongly risen vs the Dollar and Euro.

The Euro will likely remain under pressure through the rest of this week as economic data is mixed with inflation rising in Germany. This creates uncertainty as markets try to grapple with the likely direction for the single currency from here. Adding to the Euro’s woes are mixed signals regarding interest rate policy from ECB officials.

The Dollar may remain firm vs the Euro and Sterling through the rest of January. Markets are looking closely at interest rates but are also keenly watching economic data coming out of the US which remains robust. This combined with geopolitical risk should lend support for the “safe haven” Dollar.

Expected Ranges

  • GBP/USD: 1.2600 - 1.2700 ▲
  • GBP/EUR: 1.1600 - 1.1700 ▲
  • GBP/AUD: 1.9275 - 1.9375 ▲
  • EUR/USD: 1.0800 - 1.0900 ▲