Pound Slips as Inflation Surges

UK inflation outperforms

The markets were bracing for inflation to accelerate in February, and the readings were even higher than expected. CPI hit 6.2% YoY, a new 30-year high. This was up from 5.5% in January and above the consensus estimate of 5.9%. Core CPI rose 5.2%, up from 4.4% and ahead of the forecast of 5.0%. The inflation data failed to boost the pound, which has dropped 0.54% on the day and is back below the 1.32 level.

The rise in inflation has been driven by soaring food, fuel and energy costs. The Bank of England has projected that inflation will hit 8% in the second quarter and has warned that it could rise to 10% by the end of the year. The Bank has raised rates at three successive meetings, from 0.10% to 0.75%, but sounded rather dovish at the last meeting. BoE policy makers face a quandary – the rate tightening cycle will have to continue to wrestle inflation lower, but the war in Ukraine and rising energy prices could slow the economy later this year and aggressive tightening could choke off economic growth.

The US Federal Reserve has come out swinging this week, as Chair Powell and other officials have talked tough about raising rates in order to win the battle against inflation. The Fed has been widely criticized for being too slow in its response to rising inflation, as Powell was preaching that inflation was transitory even as CPI rose month after month.

On Monday, Powell said that inflation was putting the recovery at risk and said that 0.50% rate hikes were on the table if needed. The hawkish remarks sent US Treasury yields higher, which has boosted the US dollar.

GBP/USD Technical

  • GBP/USD faces resistance at 1.3259 and 1.3341
  • There is support at 1.3130 and 1.3048