Sterling firmer after UK inflation data

Sterling has gained some ground this morning after the release of stronger than expected UK inflation data a short while ago. The pound has jumped by around half a cent to $1.35 against the dollar, albeit this still leaves it a touch below yesterday morning’s levels, and is a little firmer against the euro at around £0.8620 (from closer to £0.8640 before the data). The dollar generally remained on the front foot yesterday although its gains were again fairly modest. It is trading at around $1.1640 versus the euro this morning, up from $1.1675 yesterday morning and Friday’s close of $1.17.

UK bonds are performing relatively well despite the stronger than forecast inflation data with 2- and 10-year yields both a touch lower at the open, in line with a small decline in euro area yields. BoE rate cut expectations aren’t much changed post the data, though the market has become increasingly pessimistic about the chances of further rate reductions following the “hawkish” cut earlier this month.  Another reduction in rates is not expected until March next year with the market not fully convinced that the BoE will lower rates again at all after that.

In terms of the details of the UK inflation data, the headline rate rose to 3.8% in July, a touch ahead of the consensus forecast of 3.7% and up from 3.6% in June. Both energy and food price inflation rose again last month, as did core inflation which increased to 3.8% from 3.7% in June. Within core, goods inflation fell to 1.6% in July from 1.8% in June but services inflation picked up to 5% from 4.7%, due largely to a jump in airfares. According to its latest forecasts,  the BoE expects headline inflation to rise to a peak of 4% in September before falling again into year-end and through the course of 2026.

For the day ahead, a final reading for July CPI inflation is due in the Euro area and the Fed publishes the minutes of last month’s monetary policy meeting. The latter will clearly be of interest given all the discussion and debate about a possible rate cut soon, though all eyes are still on Fed Chair Powell’s speech at Jackson Hole on Friday.