UK Pound Surges Amid Inflation Data, Bank of England’s Move and Economic Landscape Explained, UK inflation and Bank of England interest rates, British pound surge, UK inflation numbers, Bank of England interest rate hike, Sterling vs. dollar and euro, Core inflation analysis, Higher-for-longer interest rate scenario, Money market traders’ expectations
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In London, the British pound was poised for its most significant one-day surge against the dollar in nearly three weeks on Wednesday. This surge was propelled by the latest UK inflation figures, which reinforced expectations of another potential interest rate hike by the Bank of England.
Sterling experienced a robust 0.35% surge against the dollar, reaching $1.2756. It achieved an almost one-week high of $1.2767, marking its most substantial one-day jump since July 28.
Against the euro, the pound saw a 0.2% increase, reaching 85.68 pence. This rise followed its highest level since August 1.
The July consumer price inflation moderated to 6.8%. However, core inflation, which excludes the volatility of food and energy prices, held steady at 6.9% in July. This figure remained flat compared to June and exceeded economist expectations of 6.8%.
Services inflation accelerated to 7.4% from June’s 7.2%.
Oliver Blackbourn, Multi-Asset Portfolio Manager at Janus Henderson Investors, commented, “Core inflation remains persistently high at 6.9%, slightly surpassing the headline level. This presents a challenge for the Bank of England, which would prefer to observe a decline in this more stable measure to indicate sustainable alleviation of cost pressures.”
Separate data revealed that British house prices grew by 1.7% in the 12 months leading up to June, marking the slowest increase since July 2020. The UK housing market faced strain due to elevated mortgage rates following 13 consecutive BoE interest rate hikes.
Meanwhile, British wages experienced record growth in the second quarter, as indicated by Tuesday’s data release, intensifying the Bank of England’s concerns about inflation.
Money market traders are now fully pricing in a 25-basis-point rate hike at the central bank’s upcoming September meeting. However, in light of persistent inflation, they have begun to incorporate around a 10% likelihood of a more substantial half-point rate increase, according to Refinitiv data.
Market expectations also reflect a total tightening of 75 basis points by the February 2024 meeting, suggesting the BoE’s bank rate could reach 6%, up from the current 5.25%.
Hussain Mehdi, Macro & Investment Strategist at HSBC Asset Management, remarked, ‘It’s evident that the necessary scale of UK monetary policy tightening will be more extensive compared to the U.S. and euro zone. The ongoing shortage in UK labor supply is translating into upward wage pressure, necessitating a scenario of ‘higher-for-longer’ interest rates.’
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