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UK inflation data spurs the pound to one week highs against the US dollar

GBP - British Pound

The pound climbed to a one week high against the US dollar and a 21 month high versus the euro after yesterday morning’s UK CPI results came in better than expected.

The UK Office for National Statistics (ONS) reported that consumer prices have risen 4.2% in October, making it the fastest pace since December 2011. After the lifting of COVID-19 restrictions earlier this year and the reopening of the economy, we have seen inflation rise rapidly. October's reading of 4.2% was far higher than the 3.1% rise recorded up to September and more than double the Bank of England's target of 2%.

Against the backdrop of Tuesday's positive UK employment figures, the results have boosted expectations of a rate hike by the Bank of England potentially as early as next month and has provided extra support to the pound.

Key Movers

The EUR/USD exchange rate, the most widely traded pair in the world, dropped to 16 month lows overnight to 1.1260. A number of comments from the European Central Bank, continued to weigh heavy on the pair as it highlighted the gap in monetary policy stance between the European Central Bank and the US Federal Reserve.

ECB Governing council member, Isabel Schnabel, said that the current rise in inflation was a welcome development. She then went on to say that the ECB continues to buy bonds is a sign that a rate hike is not imminent. This could keep the euro under pressure for a while to come.

The markets appear to be positioning themselves for a US Federal Reserve rate hike by as early as mid-2022, which has been bought forward from what was a 2023 hike anticipated not long ago. The US dollar remains on the front foot with this backdrop, and inflation and interest rates remain central focus for all currencies at the moment.

Expected Ranges

GBP/EUR: 1.1865 - 1.1940 ▲

GBP/USD: 1.3455 - 1.3535 ▲

EUR/USD: 1.1260 - 1.1345 ▼

GBP/AUD: 1.8410 - 1.8645 ▲