The pound rises to more than two-month highs as inflation slows less than expected

22 Mayıs 2024

Today’s market analysis on behalf of Samer Hasn Market Analyst and part of the Research Team at XS.com

 

The pound hits two-month highs as inflation slows less than expected

The British pound rose by 0.3% this morning against the US dollar shortly after 6:00 a.m. GMT, reaching further levels that we have not seen since last March 19 at 1.27513. At the same time, the euro declines against the pound by the same percentage and also reaches the lowest levels since last March 11 at 0.85152.

The pound’s gains today came with a weaker-than-expected slowdown in inflation in Britain and the highest levels of public borrowing in a year, also exceeding expectations.

Although today’s inflation reading was not at expectations, it does not appear to have changed the markets’ hypothesis about the possibility of the Bank of England cutting interest rates for the first-time next June and the almost inevitable cut in August.

While monetary policy makers at the central bank have shown flexibility towards starting to cut rates this summer, especially with the progress made in combating inflation and the return of the unemployment rate to rise for three months in a row. Also, continuing to keep rates high for a longer period may lead to excessive tightening due to the rise in rates and real bond yields, which will exacerbate the burden of financing costs, which limits the growth of economic activity and hinders the recovery of the housing market, which suffers from very high mortgage rates.

In today’s data, annual inflation had slowed to 2.3% in April from 3.2%, which was higher than expected at 2.1% according to the Office for National Statistics (ONS). Monthly inflation also grew faster than expected at 0.3%. With the exception of volatile food and energy items, core inflation also slowed less than expected to 3.9% from 4.2% on an annual basis.

While the down trend of prices for homes, gas and electricity, in addition to food, was what led to the slowdown in inflation, according to ONS.

In light of the April inflation reading, the real yield on ten-year government gilt has risen again to 1.937%, which is slightly below the highest levels since 2016.

The producer prices readings were mixed in April as input prices reversed the contraction in March to an unexpected growth of 0.6%, while factory gate prices grew by 0.2%, which was less than expected.

Net public borrowing also rose more than expected to the highest level in a year to 19.6 billion pounds in April, up from 12.1 billion in March. Government spending also rose to 111 billion pounds in April, an increase of 4.4 billion pounds over what it was in April of last year, with an increase in social benefit payments and spending on goods, services, and investment, in exchange for a decline in spending on subsidies with the cessation of energy subsidies.