UK Inflation Remains Painfully High – Sterling Update

GBP

With both the Fed and ECB raising rates by another 25bps, markets believe that the BoE will replicate next week, raising UK rates to 4.5% in the process. That would be the twelfth straight meeting in which the BoE have raised rates. Much the same as with this week’s meetings, markets will focus on the BoE’s guidance for future UK rate moves, which is especially tricky, given the uncertain economic backdrop. In the case of the BoE, the voting pattern may also give some better signals, given that two of the nine member committee voted for a pause at last month’s meeting. Could there be more dissenters this time round?

Any BoE members voting for a pause will have to look beyond the fact that Inflation still remains painfully high in the UK, with the latest reading of 10.1%, nearly double that of the current inflation rate in the US. There may be some better news on the horizon, with energy prices slipping ever-lower, and food price inflation set to decline – according to a recent survey from British retailers. Indeed, in a recent survey conducted by Citibank and YouGuv, overall public expectations for inflation a year from now have declined from 5.4% to 5.2% over the past month. There was also some better news from the UK housing market of all places this week, with Nationwide House Prices increasing by 0.5% over the past month, in spite of those cumulative BoE rate hikes. Added to that was a decent surge among the latest PMI data, with both the Composite (up from 53.9 to 54.9) and Services (up from 54.9 to 55.9) beating estimates and remaining comfortably above the key 50 threshold, even if that has been achieved by raising prices along the way.

Aside from the BoE, the latest UK growth data is released a day later, with an expected GDP decline of 0.1% during the first quarter. GBP/USD has edged slightly higher over the week, driven mostly by the weakening USD. Indeed, GBP/USD is now back over 1.2600, a level not traded in almost a year. Having also risen back over 1.1350 last week, GBP/EUR has since consolidated gains.

EUR

In an ‘almost unanimous’ decision, the ECB raised all Euro area interest rates by a reduced 25bps yesterday (Thursday), increasing their main refinancing rate (policy rate) to 3.75% in the process. The ECB decided to opt for a smaller hike this time round, given tepid growth in the region of late. Much the same as in the US, the rate hike had been fully priced in by markets. However, markets went into the meeting expecting a hawkish tone from ECB President Lagarde in her post-meeting conference, given persistent Euro area inflation.

On that note Lagarde delivered, proudly announcing that ‘it is very clear that the ECB are not pausing,’ which should help to keep the Euro bulls amongst us happy. Lagarde also mentioned that the region’s ‘inflation outlook has upside risks’. In data released this week, the latest regional inflation posted a slight improvement, with annual core inflation declining from 5.7 to 5.6%.

The single currency has so far failed to take advantage of the ECB’s hawkish tones, with EUR/USD steady near the 1.1050 region, having been able to penetrate beyond the recent yearly high approaching 1.1100, which was set a week ago. Ahead of the ECB, there were some worrying sings from the latest German Retail Sales data, with sales declining by a surprising 2.4% throughout March, pushing the yearly figure down to a dismal -8.6%. It is abundantly clear that German consumers are speaking with their feet, as they react to the ongoing rate hikes in the region.