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Sterling remains buoyant on inflation data

GBP - British Pound

The pound held its ground well overnight despite pressure from the US dollar. After Monday's announcement from Prime Minister Boris Johnson that the June 21st easing of all lockdown measures will be postponed by four weeks, the pound could have weakened. Instead, it remains buoyant, especially after the release of stronger than expected inflation data this morning.

UK CPI year on year posted a better than expected reading of 2.1% versus expectations of 1.8%. This suggests that inflation in the UK is on the rise, and the Bank of England could be posed with the same dilemma as the central bank in the US, which could ease its asset purchase programme and increase interest rates faster than expected due to rising prices.

Some have also argued that the decision Monday from the UK government was already priced into the market.

Key Movers

All eyes in the market are firmly fixed on the Federal Reserve's Monetary Policy Committee's announcement tonight at 7pm UK time. This could be a very significant event for the US dollar and the broader market, and the repercussions of the announcement could be felt for a few weeks.

On the one hand, there are calls for Jerome Powell and the Federal Reserve to start tightening monetary policy, through the tapering of its asset purchasing programme. With inflation in the US at highs we haven't seen since August 2008, there is plenty of rationale for this.

However, thus far, the US central bank has maintained its stance that this rise in prices is temporary, and once we see a normalising of supply chain issues, as well as the easing of pent up demand from the pandemic, that prices will return to normal. With weak data from the US, including yesterday's retail sales posting which came out at -0.7%, this also suggests that the Federal Reserve could leave things unchanged.

However, from the strength in the US dollar this morning, it seems that much of the market is anticipating a move from the bank tonight. We could see the bank disappoint, in which case the US dollar may weaken. All in all, there could be some volatility into the rest of the week and maybe beyond, as the market digests whatever decision is made.

Expected Ranges

GBP/USD: 1.4045 - 1.4140 ▼

GBP/EUR: 1.1610 - 1.1670 ▲

EUR/USD: 1.2065 - 1.2150 ▼

GBP/AUD: 1.8180 - 1.8500 ▲