- The GBP/USD currency pair remained on the cusp of psychological support 1.2000.
- The currency pair is stable around the 1.2050 level at the time of writing the analysis.
- Rising UK inflation is sending the pound higher against the euro and dollar, but that’s not good news.
- Sterling was higher after the UK inflation was announced at 10.1% in July – exceeding economists’ expectations by a significant amount – leaving it more than five times above the BoE’s target.
The new inflation rate to a 40-year high means the bank is likely to rise by 50 basis points in September. For its part, the Office for National Statistics said that inflation in the UK rose to 10.1% on an annual basis in July, ahead of expectations of 9.8% and 9.4% in June. Core inflation rose 6.2% on an annual basis, ahead of expectations of 5.9% and 5.8% in June. Commenting on the figures, Hussain Mahdi, analyst at HSBC Asset Management, said: „Inflation continues to rise without expecting a halt in the coming months with higher household energy bills and continued service inflation supported by the continued resilience in the labor market.”
The initial reaction from sterling has been to rally, a traditional and probably unexpected reaction driven by algorithms. But the gains were soon given up, confirming that this inflation was a bad surprise for the British economy. The Bank of England will have to act decisively and introduce further rate hikes that will constrain the economy to the point of entering a recession, something the Bank expects to happen early in the year.