GBP rallies after stronger than expected labour market data
The GBP has held overnight gains against both the euro and dollar following official data that showed a slight downturn in headline UK inflation. This is despite remaining elevated in double-digit figures, prompting traders to raise bets for another 50 basis point interest rate hike at the Bank of England in February.
The Consumer Prices Index (CPI) was in line with economist expectations as it rose by 10.5% in the 12 months to December 2022 said the ONS, down from 10.7% in November. On a monthly basis, CPI rose by 0.4% in December 2022, compared with a rise of 0.5% in December 2021. This was also in line with analyst expectations.
Falling motor fuel prices provided the largest downside contribution while upside pressures came from restaurants, hotels, food and non-alcoholic beverages. These dynamics were reflected in a stubborn core CPI inflation reading of 6.3% year-on-year in December, which was unchanged on November but slightly higher than economist forecasts.
Core inflation is of particular concern to the Bank of England as it reflects domestic economic dynamics and is therefore considered to be within its remit. With core inflation running at almost triple the Bank's 2.0% target, further interest rate hikes are likely in February and March.
Following the inflation announcement, GBPEUR shot up to highs of 1.1411 before stabilising around the 1.1370 mark where it currently trades. GBPUSD also enjoyed a bouyant start to Wednesday, with the rate noting highs of 1.2345 after opening in the high 1.22's (a 1% increase from yesterday).
USD rates have fallen heavily in recent months and developments in China have been a prominent driver of this trend, hence Beijing's focus on economic recovery might now count as another headwind for the medium-term outlook.
There are possible implications for Dollar exchange rates in any environment where China's reopening and recovery lifts other economic boats. Not least because many economists suggest that when the rest-of-the-world economy grows faster than its U.S. counterpart, we see a recipe for Dollar weakness.
EURUSD is also extending its rebound north of 1.0850 following a dovish Fed and falling US treasury yields. On the day, the pair is trading up 0.63% at 1.0861.
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