20/05/2021

Market report: pound falls despite upbeat inflation data


GBP

Sterling fell against the euro and dollar on Wednesday despite UK inflation data beating expectations.

According to data released by the Office for National Statistics (ONS), Consumer Price Index (CPI) inflation year on year surpassed expectations of 1.4% to read 1.5%. While the month on month figure met expectations to read 0.6%. Both readings were significant jumps which effectively doubled the previous month’s.

The ONS said household utilities, clothing and motor fuels are the main reason for the higher reading with petroleum products showing growth of just over 50%.

Usually upbeat inflation data would result in a host currency strengthening as it raises the prospect a central bank may have to tighten monetary policy to curb the inflation rise. However, here it would appear that markets would have needed a stellar number north of the banks 2% inflation target to force talk of the Bank of England tightening policy.

Given that the 1.5% rise is still someway off this target, it’s likely the data falls in line with BoE expectations that a rise in inflation will be temporary. This simply isn’t enough to force the bank to alter its “wait and see” approach.

USD

The dollar rallied on Wednesday afternoon following the release of April’s Federal Open Market Committee minutes.

According to the minutes, policymakers discussed quantitative easing with several participants concerned inflationary pressures risk building to unwanted levels. As a result, some policymakers hinted a conversation about adjusting the pace of asset purchases may be appropriate if the economy continues to make rapid progress.

The minutes were deemed fairly hawkish by a market looking for fresh impetus and resulted in a late day boost for the dollar.

Key announcements

13:00 – EUR – European Central Bank President Lagarde speaks


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