Sterling Declines After Inflation Data Takes Off Pressure From Bank Of EnglandFebruary 17, 2023
On Wednesday, the British pound recorded declines against major peers, which saw it break a rally against the euro that had been going for seven days.
This was after data showed that inflation in the UK had seen a bigger-than-expected decline in the previous month, which boosted expectations of the rate hike cycle of the Bank of England (BoE) to end soon.
Data on Wednesday showed a decline in the inflation in the UK in January to 10.1%, while it had stood at 10.5% in December. It had been expected to decline to 10.3%.
There was also a drop in the underlying measures of price growth that the British central bank has been watching rather closely.
This also added weight to hints from the Bank of England that inflation in the country may have reached its peak.
There was a 0.8% drop in sterling on Wednesday, as it came down to $1.2078 against a US dollar that remained strong for the most part.
The British pound came down from highs of two weeks and was on course for its sharpest decline in a single day in this month.
Wednesday’s trading session saw the British currency record a decline of as much as 0.9% to a value of $1.20685.
There was a 0.7% rise in the euro-sterling pair to reach 88.75 pence after it had recorded losses of more than 1% in the last seven trading sessions.
Market analysts said that there may have been a fall in the risk of a sharp recession, but the Bank of England (BoE) may decide to take a less hawkish approach in its next MPC meetings in light of the inflation data.
They added that swap markets were indicating that there would be two more hikes by the British central bank before it puts an end to its hiking cycle and these would not be more than 25 basis points each.
The analysts said that this would be significantly less aggressive as compared to the European Central Bank (EBC) and the US Federal Reserve, which could see the sterling record some major declines against its peers.
Earlier in the month, the Bank of England (BoE) hiked the interest rates for the 10th time in a row, as the 50 basis points increase saw the rate go up to 4.0%.
The monetary authority also indicated that peak rates could be close, which would certainly come as a relief to the British economy, considering that it did not see any growth in the final quarter of 2022.
Since then, there have been mixed signals coming from rate-setters for the Bank of England (BoE). Those like Catherine Mann and Jonathan Haskel have called for a tighter policy.
Market analysts said that a tight labor market was a big risk because it would give unions the power to ask for more wage increases and this could add to inflation.
Investors will also be keeping track of British politics, after the resignation announcement from the First Minister of Scotland, Nicola Sturgeon.