A cloud has now been thrown over the direction of the British pound after yesterday’s inflation figures cast doubt on the number of rate hikes the Bank of England will deliver this year.
CPI figures from the UK hit the market yesterday at 2.5 percent against analysts’ expectations for a figure of 2.7 percent which marks the lowest level in more than a year.
Only a few days ago the market was pricing in a 100 percent chance of a rate hike in May but after yesterday’s news the odds have fallen.
Adding fuel to the fire was the release of today’s retail sales figures which came in at -1.2 percent against a consensus of -0.5 percent which is a significant fall and goes to show that any rate hike is going to hit the consumer hard and force further cut backs in spending.
"The UK inflation data this morning may have thrown a spanner in the works for the Bank of England, which has for months been preparing markets for an interest rate hike, most likely in May. ," said Oanda senior market analyst Craig Erlam.
The central bank has long highlighted the above target inflation as a concern that requires a rate hike in order to bring it back towards target, despite the fact that it was primarily driven by a one-time currency depreciation, more than half of which has since been reversed” he added.
Also, yesterday the house of Lords voted against a key part of Prime Minister Theresa May’s Brexit policy, which means that the `British PM will have to forge out a deal to keep Britain in the customs union with the EUThe news proves that apart from potential rate hikes, Brexit negotiations are going to be a key driver of the pound moving forward.
"The main risk for the British currency remains Brexit, however, the market seems to be ignoring this, which is quite a courageous step if one considers the latest comments on both negotiating sides. said Thu Lan Nguyen, a foreign exchange analyst at Commerzbank.
“No agreement has been reached on the question of the Irish border. And without that an exit agreement and thus an agreement on a transition period remain impossible. The situation for Sterling exchange rates remains tense," he added
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