Sterling Retreats with UK Inflation Reaching 40-year High

On Wednesday, the British pound retreated after data showed that consumer inflation in the United Kingdom had reached a 40-year high. This gave rise to new worries about a slowdown in the economy, just as the Bank of England is set to raise interest rates in the next couple of months.

Inflation Numbers

Consumer inflation for the month of May reached a whopping 9.1% because of rising food prices. This is the highest rate of inflation recorded in the G7 countries and highlights just how severe the cost of living crisis has become in the fifth-largest economy of the world. The inflation numbers were in accordance with market expectations.

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Plus, it pushed money markets to price in a bet of a 25 basis points rate hike by the Bank of England in August. But, there was a decline in the odds of a hike of 50 basis points from 74% to 60%, even though analysts did say it could happen.

Analysts said that the latest data of the US economy shows that the feverish pace of consumer prices does not appear to be coming down any time soon. Forecasts from the Bank of England already indicate that inflation numbers are expected to hit 11% by October and the economy seems to be moving towards it at a faster rate than expected.

Sterling Declines

The British currency had declined against the US dollar which seemed to be gaining strength and shortly after the consumer price data, the Sterling reached a low of one week. It had declined by 0.4% by 0927 GMT to reach $1.223 after experiencing gains of two days. There was a 0.2% drop recorded in the pound against the euro, as it was down to 85.96 pence.

Market analysts stated that the Sterling was pushed lower because investors are concerned that rising prices will lead to a slowdown in the growth of the UK economy in the rest of the year. However, they said that if the Bank of England decides to become more aggressive in terms of interest rate hikes, then Sterling data could turn out to be bullish.

Last Thursday, the Bank of England hiked the interest rate to 1.25% and stated that it was ready to take more action in order to combat the risks of inflation. But, it did not take stronger action like other central banks, such as the US Federal Reserve, or the Swiss National Bank. There is a possibility of a stronger hike in the next month.

Market analysts said that UK inflation has already hit 9% and it will go into double-digits because of the rise in energy costs. There are rising chances of a rate hike of 50 basis points by the Bank of England, but it cannot be very aggressive when the economy has already become so fragile. Traders were also following two by-elections that are scheduled for Thursday, one in Honiton and Tiverton and the other in northern England in Wakefield.

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