Home Daily Commentaries Sterling slips as UK inflation hits 10.1%

Sterling slips as UK inflation hits 10.1%

Wednesday 17 August, 2022

Daily Currency Update

UK inflation data was released at 7am this morning and showed that prices are rising at an annualised 10.1%, the fastest increase since February 1982. The rise from last months 9.4% was higher than expected and heaps more pressure on the government to act to help households being hit by soaring costs, which are only set to get worse when the energy price cap is lifted in October. The Bank of England predicts that inflation could top 13% in the autumn before falling back as we head into 2023. Whoever is elected as new Prime Minister may be forced to act to help cash-strapped households, whose drop in spending is likely to see the economy enter recession before too long. A recession which could last around 15 months if the BoE's projections come to fruition. The pound has see-sawed on the release this morning, with an initial jump being followed by a gradual fall. Although this means the chance of a 50bp interest hike from the Bank has increased, which would normally benefit a currency, markets are selling the pound as the hotter than expected reading means the economy is likely to go into reverse sooner than predicted. GBP/USD is back under 1.21 with GBP/EUR hovering around 1.19.

Key Movers

Today sees Retail Sales numbers for July released from the US, with a monthly uptick of 0.1% eyed by markets. Later on this evening we have the minutes from the last Federal Open Market Committee interest rate decision where policymakers decided to raise rates by 0.75%. The minutes will be scoured for clues whether Fed members are looking to slow the pace of rate hikes as we head towards Christmas, and keep an eye on economic data, or press ahead with an aggressive tightening cycle to combat inflation that is at a 40-year-high. The US has had two quarters of economic contraction, so there was a feeling that the Fed may slow its rate hiking path after another 75bp rise in September. However, there is some disconnect as to what markets believe vs recent Fed members comments, so we could see some volatility on the back of the minutes, as well as the earlier Retail Sales data.

From the Eurozone we have the first estimate of second quarter GDP from the bloc with another 0.7% rise in growth predicted. The data may be quickly forgotten however as it is backward looking and the outlook for the bloc is drastically different now compared to the end of June given the huge uncertainty over energy supplies over the winter. EUR/USD is around the 1.0150 level.

Expected Ranges

  • GBP/USD: 1.2015 - 1.2045 ▲
  • GBP/EUR: 1.1850 - 1.1970 ▲
  • GBP/AUD: 1.7230 - 1.7390 ▲
  • EUR/USD: 1.0090 - 1.0260 ▼