The Pound plunged circa 250 pips on Tuesday as traders were surprised by another rise in the US core inflation, buying the US dollar afterward.
On Wednesday, the pair is trying to consolidate, and it has erased half of the losses suffered yesterday, moving higher after the UK inflation data.
UK inflation numbers
According to data released earlier by the Office for National Statistics, inflation dipped in August, although it still hovered around a 40-year high.
Below consensus projections of a rise to 10.2%, consumer price inflation fell to 9.9% from 10.1% in July. The main cause of the dip was a decrease in fuel inflation, which went from 43.7% to 32.1%.
The data also revealed the increase in food prices in August from 12.8% to 13.4% and the increase in apparel prices from 6.9% to 7.9%.
Core inflation, which excludes food, alcohol, tobacco, and energy, increased slightly from 6.2% to 6.3% annually.
“A fall in the price of motor fuels made the largest downward contribution to the change in both the CPIH and CPI annual inflation rates between July and August 2022,” the ONS said. “Rising food prices made the largest, partially offsetting, upward contribution to the change in the rates.”
Despite its prediction that the nation would face a protracted recession in the fourth quarter, it is still probable that the Bank of England will continue its tightening course.
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According to Bank of America, the BoE will increase interest rates by half a percentage point at its upcoming meeting and the two sessions after that. Then, in 2023, the BoE will increase rates by another quarter points, reaching 4% by August of the following year.
US inflation surprises
The report of the high US inflation rate on Tuesday caused the cable to plunge. The headline US CPI, which includes food and gasoline prices in the calculation, came in at 8.3%, above the consensus estimate of 8.1%. While the core CPI unexpectedly rose to 6.3% against the expected 6.1%.
As a result, The 10-year US Treasury note’s yield increased to 3.412%, while the 2-year note’s yield is now at 3.76%, the highest since November 2007. Moreover, markets now price a 25% chance of a 100bps rate hike at the Fed’s next week’s meeting.
“The overall environment remains sterling negative. Running a large current account deficit and having a large financial sector representation in the UK economy, slowing growth and weaker equity markets should leave sterling as an underperformer.” said analysts at ING, who expect the pair to fall to 1.14.