Inflation data comes into focus for the pound

Daily Currency Update

Economists at Rabobank expect the British Pound to remain under downward pressure over the coming months, stating that, “Currently, the UK is the only G7 economy not to have recovered to its pre-pandemic levels. In addition to weak growth, the UK economy is characterised by high inflation, low productivity, weak investment growth, post-Brexit trade frictions, and a current account deficit.” They also “continue to expect GBPEUR to edge to 1.11 by the middle of the year and see scope for further dips below 1.20 for GBPUSD.”

All eyes are on tomorrow's UK CPI reading, which will provide the market with clues on how the Bank of England's latest bout of interest rate hikes will feed through to inflation. The bank’s target is to bring inflation back down to 2%, and with previous readings above 10%, there is a long way to go. The US has recently seen its CPI drop to 6%, and similar postings in the UK could see another round of Sterling selling, as the market speculates a slowdown in monetary tightening and the need for the UK central bank to cut rates later in the year.

This morning’s UK claimant count change came in at 12.9k, less than the forecasted 17.9k. Unemployment data was unchanged, released at 3.7% as it was previously. The market is looking for robust UK economic data, which is very much in the spotlight now. If the economy continues to show signs of weakness, the market will continue to lack confidence in the pound, which has been one of the worst-performing currencies in the last 12 months.