GBP/USD stays near cycle highs after UK inflation data

The Pound has been volatile today as investors reacted to the latest UK inflation figures.

UK price pressures remain elevated

Consumer price inflation in March was 10.1%, according to newly released data from the Office for National Statistics, down from the unexpectedly high rate of 10.4% in February. A drop to 9.8% was predicted by economists. In addition, CPI increased by 0.8% month-over-month compared to March’s 1.1% increase.

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Excluding the more volatile categories of food, energy, and tobacco, core CPI including owner occupiers’ housing expenses (CPIH), increased by 5.7% in the 12 months ending in March, remaining constant from the previous month. Above expectations, core CPI came in at 6.2%.

The average price of a liter of gasoline dropped from just over £1.60 in March 2022 to just over £1.47 last month, contributing nearly entirely to the decline in headline inflation. The most significant individual contributors to the overall decrease in headline inflation were the transportation sector and the housing sector. However, rising food costs, particularly those of bread and grains, which increased by 19.1% in the year to March, more than offset this effect and kept the headline rate high.

Analysts expect more BoE rate hikes

Goldman Sachs stated that it has automatically adjusted its UK inflation prediction to predict 3.9% yearly headline inflation and 4.3% annual core inflation in December 2023. Because of this positive development, the bank still anticipates a 25bp increase from the MPC at its forthcoming May meeting.

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As the Financial Times points out, the Bank of England (BoE) closely monitored these numbers because they were the last major data release before the BoE’s next meeting in early May. However, while policymakers had hoped to see the first signs of a significant drop in inflationary pressure, core inflation, which excludes food and energy prices, remained unchanged at 6.2%, which is still too high to give them comfort.

Now that we know what April’s gas and electricity rates will be, this component’s yearly growth will drop from 96 per cent to 27 percent, but customers won’t notice a difference because the energy price cap is still at the same level. In the summer, economists anticipate a decrease in these costs.

Capital Economics said: “Plunging energy price inflation will soon drag down CPI inflation more significantly, but the stubbornness of core inflation suggests that the fight against inflation is lasting longer than the Bank of England expected. This supports our long-held view that the Bank will raise interest rates to 4.50% (from 4.25% now) in May. It’s possible that rates may have to rise higher.”

Despite the surprising CPI print, the Pound has failed to defend daily gains, dropping to an unchanged level ahead of the US session. The key 1.2450/1.25 barrier is still there, making the way up pretty difficult. However, the short-term support is at 1.2350, and as long as Sterling trades above it, the immediate outlook appears bullish.