Pound rose on Monday, with investors focusing on the highlight of the week, the release of inflation data on Wednesday. Sterling had strengthened last week, on Friday, following positive UK GDP data, which came at 0.9%, beating expectations of a 0.4% reading. This has put the UK economy above pre-pandemic levels and helped lift the pound.

In the week ahead, traders will focus on UK inflation and the release of retail sales. If UK inflation rises by more than expected then the pound could go higher, as this may increase the possibility of an interest rate hike by the Bank of England.  

For the UK retail sales, investors expect sales to fall by 0.6% in December, but any surprises could create volatility for the British currency.

UK Inflation

Wednesday’s inflation figures will be the main driver for the pound and the most important release for the UK, for this week. They will come ahead of the Treasury Select Committee meeting where Bank of England (BoE) Governor Andrew Bailey, Deputy Governor Jon Cunliffe, and external members at Financial Policy Committee, Dame Colette Bowe and Elisabeth Stheeman will provide oral evidence in relation to the December Financial Stability Report. The BoE’s Financial Stability Report sets out the Financial Policy Committee's view on the UK financial system’s stability and what actions will be taken to remove any potential risks.

 After rising to 5.1% in November, CPI inflation is expected to rise further in April as utility prices increase, according to economists at Capital Economics. When utility prices rise on 1st April, around 50%, then this will add 2.1ppts to overall inflation pushing it up to 6.9%.

Economists expect that the annual rate of inflation rose from 5.1% to 5.2% in December. This will create sensitivity to the pound, especially if this affects market expectations for the timing of another interest rate rise from the BoE.

Could the pound rise further this week?

The pound could benefit if Wednesday’s inflation data is better than expected and the market strengthens its belief that February is more likely the right time for the BoE to raise the interest rate further. Markets expect a series of interest rates in 2022, an expectation that has already helped boost the pound, and could lend further support if inflation data beats expectations. However, any change in rhetoric by the European Central Bank (ECB) that could be seen as supportive to the euro will act as a headwind to Sterling. The ECB has insisted that it has no intention of raising interest rates in the Eurozone this year but with inflation rising in December, it could begin to accept the need to act in the months ahead.

But with limited news coming out of the Eurozone, analysts have noted that the pound to euro rate will be mainly affected by Wednesday’s inflation figures and any relevant commentary from BoE Governor Bailey and his colleagues when they offer their latest testimony about the latest financial stability report.

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