Record inflation takes centre stage
Thursday 14 April, 2022
Daily Currency UpdateUK CPI on Tuesday posted 30 year highs at 7%, causing a bounce in the pound over the last two days. With inflation so high, the market is starting to believe that the Bank of England will likely raise interest rates in their May meeting and may continue raising interest rates to stem the tide of inflation. Inflation could hit double figures in the UK this year, and with UK households already feeling the pinch of rising energy prices, raising interests rate could make the cost of debt and mortgages unbearable for some. It’s a difficult position for the UK central bank, and with slowing growth and talk of stagflation in the UK, it could be a rocky road for the pound in the coming months.
Key MoversUS PPI, another indicator of inflation, hit a record high of 11% in its posting yesterday. Prices on a wholesale level rose a staggering 11.2% year-over-year in March, well above the 10.6% reading expected by traders and economists and the highest level on record for the indicator (dating back to November 2010). The US dollar did little to react to the posting, and actually was on the back foot, but this could be short-term profit-taking. With the US Federal Reserve expected to raise interest rates in May and continue on an aggressive path of tightening monetary policy, some corners of the market expect the US dollar to be a beneficiary of this stance from the US central bank in the coming months.
Most of today’s focus for the euro will be on the European Central Bank meeting later in the session, with the policymakers having to cope with record-high inflation as well as concerns about a war-related recession. As it stands the ECB plans to end its emergency bond-buying at some point in the third quarter, with interest rates going up "some time" after that. However, many of the central bank's peers have already started tightening policy, and investors will likely be looking to see if the central bank provides a clearer schedule for unwinding its extraordinary stimulus. There has been concern over the last few months that the ECB maybe left behind, as others raise interest rates and control inflation, so a lack of clear direction today could see the euro under pressure.
- GBP/USD: 1.3060 - 1.3185 ▲
- GBP/EUR: 1.2010 - 1.2075 ▲
- GBP/AUD: 1.7380 - 1.7625 ▼
- EUR/USD: 1.0845 - 1.0965 ▲