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UK Pound Strengthens: Inflation Data Fuels Speculation of Further Rate Hikes

Pound

In a significant development, the British pound poised to experience its most substantial one-day surge against the dollar in over a week, highlighting the impact of the latest UK inflation figures that have intensified expectations of another interest rate hike by the Bank of England.

The July consumer price inflation witnessed a slowdown to 6.8%. However, core inflation, excluding the volatile components of food and energy prices, maintained its standing at 6.9% during the same period. This consistent core inflation figure remained unchanged from June, defying economist predictions of a 6.8% reading. Additionally, service sector inflation demonstrated an increase, rising from 7.2% in June to 7.4% in July.

British Pound Posts Notable Gains Against Dollar and Euro

As of the latest data, the British pound had gained 0.3% against the dollar, reaching $1.2736. This upward movement marks the most substantial single-day leap since August 7th. Against the euro, the pound also registered a 0.1% rise, resulting in the euro being valued at 85.75 pence.

Oliver Blackbourn, Multi-Asset Portfolio Manager at Janus Henderson Investors, noted that the persistent core inflation level of 6.9%, which now slightly surpasses the headline level, presents a challenge for the Bank of England. The central bank aims to witness a decline in this less volatile measure, indicating a sustainable return of cost pressures to their target. The data released on Tuesday, revealing record wage growth in the second quarter, added to the Bank of England’s concerns regarding inflation.

Looking ahead, money market traders have completely factored in a 25 basis points hike at the central bank’s upcoming meeting in September. There is also a roughly 10% probability of a more substantial half-point rate increase.

The markets have also priced in a cumulative tightening of 75 basis points by the February 2024 meeting, suggesting that the Bank of England’s bank rate could reach 6%, up from the current 5.25%.

Hussain Mehdi, Macro & Investment Strategist at HSBC Asset Management, emphasized that the UK’s monetary policy tightening is expected to be more substantial compared to the United States and the eurozone. The persisting labor supply deficit in the UK is resulting in increased wage pressures, reinforcing the need for a scenario of higher interest rates over an extended period.

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