Home Daily Commentaries Bank of England open to 50bp hike as UK inflation hits 9.4%

Bank of England open to 50bp hike as UK inflation hits 9.4%

Wednesday 20 July, 2022

Daily Currency Update

This morning saw UK inflation hit another multi-decade high as the Consumer Price Index came in at 9.4% y/y, higher than most analysts had forecast. The accompanying information, published by the Office of National Statistics that compiles the data, showed that the biggest upward contribution to inflation came from fuel and food costs, as prices at the pump remain around £2 a litre. Shortages of grain and pipeline constraints see supermarket prices continue to trend higher.

It should be noted that the pace of price rises has moderated over recent months, however the Bank of England is still predicting double-digit inflation before too long, a situation the UK hasn't found itself in since the early 1980s. In a speech at Mansion House in London yesterday, the Bank of England Governor said that an unprecedented 50bp hike was "on the table" at its next monetary policy decision, which is due August 4th.

The usual jump in a currencies value has failed to materialise on the back of Baileys comments and above target inflation print, as the UK economic outlook is looking pretty gloomy. A lot of the inflation the UK is experiencing is imported. UK consumers can't control the international price of oil, gas, and the shortage of grain being seen at the moment. Therefore, hiking borrowing costs in the face of rising prices whilst the economy slows is a far from ideal situation, however one that has to be addressed even if it risks putting the UK economy into recession. On the back of this, GBP/USD, which was around the 1.2030 mark before the CPI release, is now back under 1.20. GBP/EUR is a little lower at 1.1725.

Key Movers

Tomorrow is likely to see the first interest rate hike from the European Central Bank since 2011 as inflation within the Eurozone continues to far exceed the banks target 2%, with June's preliminary number showing 8.6% y/y.

In the face of these soaring prices, there is a very good chance that ECB chief Christine Lagarde will decide that an aggressive 50bp hike to get the ball rolling is warranted, with another 50bp hike possible at its next meeting in September. This is far from a forgone conclusion, however, given the EUR/USD jump from close to parity to above 1.02 over the past few days. It seems markets have begun to price this scenario into the EUR value.

It should be noted that the Eurozone is in a similar situation to the UK, as the growth outlook is shaky at best and the spectre of Russian gas supplies being turned off hangs over the bloc. The annual engineering work on the Nord Stream 1 pipeline that pumps gas to Germany from Russia is due to finish today, with gas supplies expected to resume tomorrow. However, many expect it to be at a reduced capacity with extra conditions on supply demanded by the Kremlin. From the USA it's a quiet day with only Existing Home Sales data due at 3pm UK time. EUR/USD currently trades at 1.0230.

Expected Ranges

  • GBP/USD: 1.1945 - 1.2050 ▼
  • GBP/EUR: 1.1680 - 1.1820 ▼
  • GBP/AUD: 1.7320 - 1.7480 ▼
  • EUR/USD: 1.0170 - 1.0280 ▲