Sterling holds amid inflation data


Yesterday saw the release of the latest UK inflation data. The Office for National Statistics showed consumer prices fell from 3.2% to 3.1% in the month of August. Despite this, the pound was still seen trading at one month highs against the dollar and around twenty month highs against the euro.

While the reading came out lower than expected, it’s unlikely to change the minds of the MPC when it comes to interest rates. Inflation is still running well above the 2% target and even though there was a small dip, that drop can be attributed to the effect of the “Eat out to Help out” scheme last year. We also expect inflation to run higher in the coming months. September saw a large increase in petrol prices, and with October so far seeing an increase in energy prices. All of this data is yet to filter through but it’s likely inflation will remain high for the foreseeable future.

The Bank of England are happy to let inflation run to 4% but they will need to take action before we get to that stage. Markets have now fully priced in a UK interest rate rise either later this year or early next year.

The pound is currently sitting in a great spot of strength. This being said, a situation presents itself in which there may now be more downside risk. As the rate hike is already priced in, only a larger than expected rise will move markets further to the upside. However, if the BoE err on the side of caution in November’s meeting or the hike is smaller than expected, we may seen the pound drop off.

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