US inflation once again beat expectations


Sterling, much like many currencies, entered the weekend on the back foot against the dollar as US inflation once again beat expectations.

Investors believed inflation was set to ease in the month of May but a reading of 8.6% saw many currencies give up gains achieved earlier in the week. Most notably core inflation, which removes transitory price changes, remained at 0.6% where the market had expected it to fall by 0.1%. With inflation remaining high and persistent, it leaves investors and the market to believe the US Federal Reserve may have to alter their current monetary policy plan. A 50 basis points rise is expected at their next meeting but the increments the Fed raises thereafter remain to be seen. As a result, we expect the dollar to remain well supported over the short term as risk off market sentiment continues to dominate.

As the European Central Bank also set to raise rates at their next meeting, the pound finds itself in a vulnerable position moving forward. Inflation remains a worry in the UK and the cost of living crisis has troubled homeowners in recent weeks. The Bank of England has committed to nothing and remained cautious on forward guidance at their previous meeting. Investors concluded the reluctance to commit to raising rates was likely due to recession fears. And these fears appear to be valid following this morning’s latest release from the Office for National Statistics. Markets expected the latest GDP reading for April to come in at 0.2% from a previous -0.1%. On the contrary, this morning’s reading showed GDP fell to -0.3%.

Looking ahead, a contraction or recession could be on the cards, should GDP continue to fall and disappoint. With global tightening happening at a fast and constant pace, the risk for the UK to fall behind remains high. All eyes move to Wednesday and Thursday with the Fed and BoE set to announce their latest monetary policy decisions respectively.

Key announcements

06:00 – GBP – UK GDP (MoM) (Apr) – (previous 0.1%, actual – 0.3%)
06:00 – GBP – UK Manufacturing (MoM) (Apr) – (previous -0.2%, actual – 0.6%)
06:00 – GBP – UK Manufacturing (YoY) (Apr) – (previous 1.9%, actual 0.5%)