News & Analysis

The UK’s CPI inflation figures came in stronger than expected on Tuesday, with the YoY headline figure printing at 5.4% vs the 5.2% estimated, while the MoM print dropped to 0.5% from last month’s 0.7% – albeit above the 0.3% expected. Meanwhile, the core figure, which excludes volatile food and energy items, rose by 4.2% YoY, well above the 3.9% consensus and above the 4.0% figure booked in December.

The headline increases were primarily driven by subcategories that go beyond just energy and food. Restaurants & hotels, furniture & household goods, and clothing & footwear were among the main drivers of today’s uptick. This suggests that price gains are fairly broad-based, which means that it is less likely that inflationary pressures will clear out once energy costs start to moderate – placing increased pressure on the Bank of England’s hiking cycle and further supporting an interest rate hike in February. According to the minutes of the Bank of England’s December meeting, the Bank expects inflation to hover near 5% on an annual basis “through the majority of the winter period” before peaking at around 6% in April when the fuel cap sees energy price increases filtered through to consumers.

While the data is seen as a decent upside surprise, the initial impact on the pound was fairly limited, with both GBPEUR and GBPUSD briefly gaining around 10 pips on the CPI beat before moderating again.

While volatility oftentimes picks up when SONIA futures open at 07:30 GMT, the lack of reaction in the pound also relates to levels sterling has recently been trading at: heightened expectations for the Bank of England to hike interest rates in February and have rates raised by almost four times by November had already seen GBPEUR trading at May 2021 highs, while GBPUSD was seen trading around levels last seen in November.


GBPEUR and GBPUSD trades around levels last seen in May 2021 and November 2021 respectively, setting the bar for further strength higher 


After yesterday’s slightly better than expected labour market data, the probability of a February rate hike from the BoE at one point rose to 92% and four hikes comfortably priced in by November.

Markets moved away from that pricing to fall back to 84%, similar to last week, while almost four hikes were still priced in by November as they were awaiting today’s UK CPI inflation data. The release of today’s data also led to a jump in front-end yields and rate hike probabilities, although at a smaller extent than Tuesday’s labour market data. On balance, this week’s jobs report and inflation data supports the odds of a rate hike for February’s meeting.


The probability of a February rate hike from the BoE has increased slightly since last week, while front-end Gilt yields were pushed higher as well 



Author: Ima Sammani, FX Market Analyst


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