Sterling takes hit after PM’s continued pressure to resign

GBP

Yesterday we saw Sterling come off its recent highs against both the USD and EUR even after strong UK employment data. It is possible that the political uncertainty surrounding Prime Minister Johnson has weighed on the pound.

The Prime Minister yesterday again denied accusations by his former adviser that he had lied to parliament about a ‘lockdown party’ but it was unclear whether he would survive the scandal.

Up until now the market had looked to ignore the scandal but this could be the first sign of it impacting on Sterling’s strength. Prime minster Johnson is now facing a revolt from his own conservative MP’s. More than twenty MP’s met yesterday to discuss their concerns regarding Johnson’s leadership with a number now ready to submit letters of no confidence after the PMQ’s this afternoon.

UK inflation continues to rise with spiralling energy costs squeezing the spending power of the UK public. Inflation soared to 5.4% from the 5.2% forecast, and as a result we have seen the pound recover its losses from yesterday against the euro and is now trading back near its recent highs.

Food prices saw their biggest year on year increase at 4.2%, which represents a four year high. This comes a day after official data showed that wage increases are being wiped out by the surge in the cost of living. Further upward pressure on inflation is expected in April when a new energy price cap could see bills for millions of households hiked by 50%.

This too will place greater scrutiny on the comments made by the Bank of England Governor Andrew Bailey when he speaks to the treasury select committee in the afternoon, as the market looks for clues on whether the BoE will look to raise interest rates to try to curb inflation in February.

Judging from the bonds market investors are hedging their bets that stimulus may soon be removed. The yield on UK Government ten year bonds rose 1.22% on Tuesday, its highest reading since May 2019. Money markets have almost fully priced in a rate rise to 0.5% for next month.

Key announcements

07:00 – UK CPI – released 5.4% forecast 5.2%
14:15 – Bank of England Governor Bailey Speaks