GBP

The pound fell on Wednesday after the release of UK inflation data. The Consumer Prices Index (CPI) rose by 10.1% in the twelve months to January 2023, down from 10.5% in December 2022. This reading also came in lower than what the market had predicted at 10.3%.

The decline of CPI saw Sterling fall and bond yields dropped as investors ‘priced out’ the extent of further interest rate hikes from the Bank of England.

Furthermore, the drop in core inflation, which excludes food and energy, confirms to the markets that the BoE may not be as hawkish moving forward. Core inflation year-on-year fell to 5.8% in January 2023, down from 6.3% in December 2022. This data came in also lower than market consensus which was 6.2%.

Money markets are now pricing in another interest rates rise of 25 basis points for next month, before the BoE decides to slow its monetary policy to see if inflation is indeed continuing its way down.

Sterling is likely to remain under pressure following the latest inflation reading. The market will now wait for BoE members to comment on policy rates moving forward.

USD

The dollar rallied to six-week highs against a basket of currencies on Wednesday after the release of string Retail Sales data. This has bolstered investors’ expectations that the Federal Reserve will keep interest rates higher for a longer period of time to help bring inflation down. The data showed Retail Sales rose to 3% last month, the biggest increase in almost two years. The increase in Retail Sales was more than what the market was forecasting at 1.8%.

With the US economy performing well and a robust labour market, it is likely that the Fed’s projections, which suggested a peak rate of 5.1%, could be altered higher to 5.2% and above.

The market is starting to price in that the Fed may not cut interest rates this year, this is keeping the dollar well supported.

Key announcements

13:30 – USD – Core PPI m/m – Forecast at 0.3% from a previous 0.1%

13:30 – USD – PPI m/m – Forecast at 0.4% from previous -0.5%

13:30 – USD – Unemployment claims – Forecast at 200k from previous 196k