The pound strengthened for a second successive day against a weaker US dollar as the positive risk mood weighed on the greenback. The release of stronger UK CPI offered support to the British pound.

The pound strengthened following Tuesday's stronger UK wage growth figures and better than expected UK consumer inflation data released this Wednesday. The headline UK CPI reached to 5.5% YoY rate in January while the core CPI, which excludes food and energy prices, rose to 4.4% YoY from. The positive releases have reinforced the case for additional monetary policy tightening by the Bank of England.

Any potential tensions over the Northern Ireland Protocol could limit further gains for the pound while the possibility of a 50 bps Fed rate hike in March should limit USD losses. For the US dollar, the main driver for Wednesday will be the FOMC meeting minutes.

UK Inflation data

UK inflation has hit a new 30-year high, which means that households will be burdened with the cost-of-living squeeze. Data released on Wednesday by the Office for National Statistics revealed that consumer prices rose by 5.5% in the 12 months to January, which marks the highest reading since March 1992 and is above the Bank of England’s 2% inflation target. Higher energy costs and transport costs helped to push inflation higher.

Chancellor of the Exchequer, Rishi Sunak, has responded to the inflation data by recognising the pressures that people will face as the cost of living rises. He said that “These are global challenges, but we have listened to people’s concerns and recently stepped in to provide millions of households with up to £350 to help with rising energy bills. We’re also helping people on the lowest incomes keep more of what they earn by cutting the Universal Credit taper rate, and freezing alcohol and fuel duties to keep costs down. In total we’re providing support with the cost of living worth over £20bn across this financial year and next.”

Prices for goods

The ONS said that various goods prices’ including those for clothing and footwear, housing and household services and furniture and household goods pushed up inflation in January. Electricity prices rose by 19.2% over the last year, while gas prices rose 28.3%. The squeeze will be felt even more this spring, when the energy price cap is lifted by 54%, and national insurance contributions rise. Furniture and household goods’ prices rose by 8.5% over the year, the highest since January 1989.

Interest rates to rise

Economists believe that interest rates will rise further, as inflation reaches 7.9% in April, adding more pressure on households. Ed Monk, associate director at Fidelity International, explained: “The pace of price rises has put the Bank of England on a much more hawkish footing and a third month in a row of interest rates rises now looks likely in March. That will, of course, squeeze borrowers even more and will add headwinds for the UK economy which has only recently managed to regain the ground lost to the pandemic.”

 

The Bank of England warned this month that consumer price inflation could reach at around 7.25% by April as increasing energy prices reach consumers.

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