Pound Jumps Following Lower US CPI

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On Tuesday, the pound (GBP) gained bullish momentum following the release of lower-than-expected US CPI data.

Britain’s unemployment rate increased for a second month, and other data released on Tuesday included an increase in older job seekers as well as other indications that some of the inflationary heat in the labor market is cooling as the economy falters.

The Bank of England (BoE), however, was likely to notice the biggest growth in basic pay ever recorded, excluding the time during the COVID-19 pandemic. The BoE is expected to hike interest rates for the ninth meeting in a row on Thursday.

Pound Marks Gains Against the Euro and Dollar

At press time, the euro (EUR) traded around 85.74 pence, and the pound was up 1.3% against the dollar (USD) at 1.2421.

When the Monetary Policy Committee meets on Thursday, the money markets indicate that investors are not quite confident the BoE will simply increase rates by a half-percentage point.

Meanwhile, futures indicate a 40% possibility of a 75 basis-point increase but a 60% chance of a half-point increase to 3.50%.

Rate expectations and bond rates blew out in September after the fiscal plan of former finance minister Kwasi Kwarteng, which caused the pound to plummet to a record low. As a result, markets will be priced at a peak rate of 6.31% by July 2023.

Since then, such expectations have subsided, and according to the markets, UK interest rates will peak at roughly 4.68% by August and then stabilize there until the first rate cuts are factored in around December 2023.

The US monthly consumer inflation report, which was released earlier today, indicated that price pressures moderated for the fifth month in a row.

Whether it will be sufficient to moderate expectations for US interest rates to peak around 5% by May or June is the question for investors.