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Sterling spikes on UK inflation data

Daily Currency Update

The pound spiked this morning as UK inflation fell but not as far as markets were expecting. The overall reading for the Consumer Price Index dropped from 10.1% to 8.7% y/y however nowhere near the move to 8.2% that had been pencilled in by analysts. The real surprise came from the "core" reading which strips out volatile products like food and fuel which pushed higher to 6.8% y/y when a hold at 6.2% had been eyed. This reading shows that underlying price pressures are much more entrenched than previously thought and will need more aggressive action from the Bank of England re: interest rate hikes to bring under control. The annual rise of food prices remains around 19%, a 45-year high which is primarily the reason the overall reading didn't fall as fast as expected despite a sharp fall in energy costs. All this considered means that BoE Governor, Andrew Bailey, and the rest of the Monetary Policy Committee may decide that three, possibly four 25bp rate hikes are warranted to quell price pressures rather than the two that had been expected before today's release. We get another CPI reading on June 21st a day before the BoE's next rate decision so a lot will ride on that however it seems a return to the Banks 2% target is a long, long way off yet. GBP/USD jumped from around 1.2430 to 1.2470 in the immediate aftermath however has pared its gains as the focus returns to the ongoing impasse re: the US debt ceiling with investors continuing to seek the dollars safety. GBP/EUR briefly touched 1.1560 its highest level since December however like versus the dollar it has since retreated to around the 1.15 level. Today sees two speeches from Bailey so all eyes will be on any clues as to high interest rates may have to go.

Key Movers

The US Treasury is getting ever closer to running out of cash to pay its bills with politicians still locked in discussions to raise the debt ceiling, the legal amount it is allowed to borrow. A default by the US Government is highly unlikely with an 11th hour deal still the expected outcome however the longer discussions drag on without an agreement between Democrats and Republicans the greater the market jitters become. As a result, riskier assets are being shunned so all major global stock markets are showing losses. Currencies like the Australian and New Zealand dollar are being sold off and the US dollar remains in favour despite its economy being the major area of concern. The closer we get to a potential default it will be interesting to see if markets turn away from the dollar and instead look to the other classic safe havens the Japanese yen and the Swiss Franc for shelter however, we aren't at that juncture yet. Data-wise yesterday saw the US mirror Europe and the UK with its latest services PMI showing solid growth and its manufacturing showing a move into contractionary territory. EUR/USD remains rangebound currently just below 1.08.

Expected Ranges

  • GBP/USD: 1.2340 - 1.2500 ▲
  • GBP/EUR: 1.1465 - 1.1565 ▲
  • GBP/AUD: 1.8820 - 1.9000 ▲
  • EUR/USD: 1.0725 - 1.0845 ▼