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UK CPI numbers hurt Sterling

Daily Currency Update

UK CPI came out as expected this morning with CPI rising to 9.1%, which is another 40 year high as food and energy costs continue to provide the biggest upwards pressure to the data. To highlight this, the core reading which strips out energy and fuel costs actually fell from 6.2% to 5.9%, thus highlighting how it is energy and fuel driving up costs. It is predicted to get to at least 10% by Q4, when another rise in the cap of energy costs is due to kick in, which will raise household bills by another 50%. Government support packages should help offset the costs, especially in lower income households. Off the back of this data release, GBPUSD dropped back to the $1.22 handle and GBPEUR dropped toward €1.16.

The release backs up the theory that the Bank of England needs to continue to tighten policy. The next 0.5% interest rate hike in August is priced into the market, however as we saw last time the Bank seems to favour more modest hikes and has never raised rates by more than 0.25%. The Fed rate decision is the week before, however, and if they again go 0.75% then that may encourage more than 3 members of the MPC to vote for more aggressive action. 3% base rate is priced in by year-end, so at some point they will need to go to 50bp as it cannot be achieved by 25bp per meeting.

Key Movers

Yesterday the one piece of data of note was from the States with US existing Home Sales showing an annualised 5.41M sales for May, which is the fourth consecutive fall. This figure highlights a slowing US economy, which has recently seen growth stall as the latest Retail Sales miss target and unemployment begin to tick higher.

The Eurozone was very quiet yesterday, with no major data until tomorrows PMI numbers, with the German Manufacturing and Services figures most closely followed.

Expected Ranges

  • GBP/USD: 1.2150 - 1.2275 ▼
  • GBP/EUR: 1.1575 - 1.1655 ▼
  • GBP/AUD: 1.7620 - 1.7785 ▲
  • EUR/USD: 1.0470 - 1.0560 ▼