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Inflation continues to dominate global markets

Daily Currency Update

The biggest data releases this week came in the form of Consumer Price Index postings from both the UK and US. The UK posted a higher than expected 7% figure, the highest posting in over 30 years. With energy prices on the rise, caused by the fall out of the pandemic and the Russia-Ukraine conflict, the rise in prices isn't a surprise to many. However, all eyes now turn to the Bank of England's next meeting in May, and how they intend to control rising prices.

Andrew Bailey and his team of policymakers are stuck between a rock and a hard place. Raise interest rates further and contend with squeezing UK households during a time when they are already feeling the pinch of rising energy prices. Keep monetary policy looser (for example don’t raise interest rates) and the bank have to contend with the possibility that inflation may hit double figures by the end of this year. The market currently prices in a potential 0.25% interest rate hike in May, but beyond this, the path the UK central bank will take looks a lot more uncertain.

Sterling saw some support on the back of the UK CPI posting this morning, suggesting the market predicts that the Bank of England may continue on its path of tightening monetary policy and increase interest rates multiple times this year. However, this is uncertain, and Sterling may witness some volatility in the weeks ahead as the market digests the reading.

Key Movers

US CPI posted in line with expectations yesterday, rising 1.2% last month, the biggest increase in almost 17 years. To many, this cemented the expectation that the US central bank, the Federal Reserve, will likely increase interest rates by 0.5% in their meeting in May. However, it was interesting to see the benchmark 10-year Treasury yield was lower at 2.721%, its first decline in eight sessions, suggesting the market has some concern about just how aggressive the Federal Reserve intend to be with reducing their balance sheet.

The US dollar was on the front foot overnight, as the expected aggressive raising of interest rates from the Federal Reserve supported the currency. This and global geopolitical tensions, including the continuing Russia-Ukraine war and the lockdowns in China, are benefitting the global reserve currency during these times of global risk aversion.

Expected Ranges

  • GBP/USD: 1.2965 - 1.3055 ▼
  • GBP/EUR: 1.1945 - 1.2045 ▼
  • GBP/AUD: 1.7385 - 1.7610 ▼
  • EUR/USD: 1.0780 - 1.0910 ▼