The pound experienced an ascent on Wednesday following data revealing that Britain’s annual consumer inflation rate rose in December for the first time in 10 months and surpassed expectations, challenging the prevailing anticipation of imminent Bank of England rate cuts.
As per the latest figures, sterling saw a 0.1% increase to $1.2650, having initially dipped by 0.19% before the release of the data. Additionally, the pound strengthened against the euro, which was down 0.16% at 85.93 pence.
Official statistics indicated that Britain’s annual consumer price inflation accelerated to 4% in December from the November figure of 3.9%, which marked its lowest point in over two years. A Reuters poll of economists had anticipated a reading of 3.8%.
In the wake of more significant-than-expected declines in inflation in recent months, these data potentially raise concerns at the Bank of England, which had raised interest rates to a 15-year high of 5.25% in August to curb escalating price levels.
Wednesday’s figures also disclosed that core inflation, excluding volatile items like food, energy, alcohol, and tobacco prices, remained at 5.1% in December, the same rate as in November. Services inflation witnessed a slight increase to 6.4% in December from 6.3% in November.
Analysts at MUFG expressed disappointment, stating, “The stronger than expected reading for both core and services inflation in December…are disappointing and will discourage the BoE from beginning to cut rates sooner.”
They further added, “The UK rate market is not fully pricing in the first 25bps rate cut from the BoE until June. The hawkish repricing of the UK rate curve has contributed to the pound strengthening modestly this morning.”
While interest rate cuts are anticipated from most major central banks worldwide in 2024, a critical factor for the pound in the short to medium term is whether the Bank of England will initiate rate cuts later than the Federal Reserve and European Central Bank and the extent of such cuts.
Current market pricing indicates an approximately 80% likelihood of a Bank of England rate cut in May. Conversely, there is slightly over a 60% chance of the Fed implementing cuts as early as March, and the first ECB rate cut is fully priced in for April, with markets indicating a small possibility of movement in March.
The prospects for Fed rate cuts diminished slightly on Tuesday after Federal Reserve Governor Christopher Waller emphasized a cautious approach toward reducing the benchmark interest rate, coupled with softer economic data from China, contributing to the bolstering of the dollar.
