By Matthew Vassallo
UK inflation figures were released this morning and showed a drop to 3.4% down from 4% last month. The official reading was lower than expected, with the markets having previously predicted that inflation would fall to 3.6%.
Following this morning’s release, UK inflation now sits at its lowest level in over two years. The news was welcomed by UK chancellor Jeremy Hunt who released a statement following the release of the inflation data in which he stated that the government’s “plan was working”. More positive rhetoric followed as he went on to say that inflation “had not just fallen decisively” but was also “forecast to hit the 2% target within months”. However, as you’d expect Labour’s shadow chancellor Rachel Reeves said prices were “still high” and pointed out that “the tax burden is the highest it has been in over 70 years”.
Whilst core inflation remains high at 4.5%, the falling base level will likely spark further discussions amongst economic analysts as to whether or not the Bank of England (BoE) will look to cut UK interest rates sooner rather than later. With the central bank’s next policy meeting tomorrow, the almost universal consensus is that they will hold rates at 5.25% this month.
The Pound’s reaction this morning falls in line with this theory as we saw a slight retraction on GBP/EUR & GBP/USD rates, before an almost immediate recovery back up to the levels Sterling was trading at yesterday against its two major currency counterparts. Those clients who hold Sterling positions may look towards tomorrow’s BoE minutes, which are released following the rate decision. These minutes provide the markets with a key an insight into the central bank’s short-term economic outlook and more often than not, have a knock-on effect on investors risk appetite for the Pound.
Any significant moves in the market rates may be tempered come Friday however, as economists brace themselves for the latest UK Retail Sales figures. The forecasts make for pretty grim reading with the current predictions suggesting we are likely to see a significant drop in numbers from last month (0.7% down to -0.7%). Therefore, any clients who are hoping for a sustained upturn for the Pound over the next couple of days could be left disappointed, if the current predictions come to fruition.