Spectrum FX Daily Report

Pound edges lower as UK inflation rises to fresh highs

Sterling slipped to a near one week low against the US dollar this morning, as ongoing concerns over the UK’s cost of living crisis continued to dampen sentiment towards the currency.

UK inflation edged to fresh highs in May according to data released this morning. Headline price growth rose by a larger-than-expected 0.7% last month (0.6% consensus), lifting the annual number to 9.1% - its highest level in 40 years. Today’s producer price and retail sales inflation numbers also both exceeded expectations. The reaction among currency traders was to send sterling lower, as investors fret that rising prices could trigger a slowdown in UK growth during the rest of the year. Conversely, we think that the data may end up being bullish for sterling should it encourage the Bank of England to raise interest rates more aggressively during the rest of the year. The MPC indicated last week that more forceful action could be on the way at upcoming meetings. Markets are, however, only pricing in around a 60% chance of a 50 basis point rate hike at the BoE’s August meeting. We think that this should be higher, and see scope for a move upwards in GBP should investors come around to the same view.

Volatility in FX has actually been relatively calmed so far this week, as market participants perhaps take a breather following last week’s hectic schedule. The US dollar is trading a touch higher for the week, ahead of FOMC chair Powell’s semi-annual testimony to Congress, which begins later today. Powell is expected to reaffirm the Fed’s hawkish policy stance, and will likely leave the door open to another 75 basis point hike when the bank next meets in July. This aggressive tightening stance is weighing on a number of the dollar’s major peers, notably the Japanese yen, which slipped to its lowest level since 1998 during Asian trading. Unlike almost all of its counterparts, the Bank of Japan has continued to strike an ultra-cautious tone on monetary policy, keeping rates steady and vowing to keep its yield curve control in place.

Chair Powell’s Congress testimony will likely dominate headlines in the next couple of days. We will, however, also be paying very close attention to tomorrow’s preliminary PMI figures out of the G3 economies. Signs of resilience in the data would ease concerns that a sharp slowdown in global growth could be on the way, which may act to support risk currencies against the US dollar.

For a live rate or to book a trade please contact us.

T: +44 203 440 7550 | E: [email protected] | W: www.spectrumfx.co.uk