UK Inflation Soars, GBP/USD Nears a Six-Week High, All Eyes on the Fed

Headline UK inflation broke a three-month trend and rose in February, rising to 10.4% y/y compared to 10.1% y/y in January and market expectations of 9.9%. Core inflation also rose sharply to 6.2% from 5.8% and half-a-point above market forecasts.

According to The Office for National Statistics (ONS), ‘The increase in the annual inflation rate in February 2023 mainly reflected price rises in the restaurants and hotels, food and non-alcoholic beverages, and clothing and footwear divisions. These were partially offset by downward effects coming from recreation and culture, and from motor fuels within the transport division.’

UK inflation is expected to move sharply lower at the end of Q2, due to lower energy costs, and was recently forecast to hit 2.9% by the end of the year by the Office for Budget Responsibility (OBR).

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Today’s numbers break a three-month trend of declining inflation in the UK and will add pressure on the BoE to hike interest rates by at least 25bps and maybe even 50bps at tomorrow’s MPC meeting. The UK has so far been immune to the recent global banking crisis but concerns remain that any further bank run may curtail economic growth sharply as banks curb their lending activity.

Cable has pushed higher after the inflation release, buoyed by higher market rate hike expectations. The pair are looking to test the recent double high around 1.2283 before 1.2292 comes into play. Above here, 1.2448 becomes a medium-term target.

Later today we have the latest US monetary policy decision (18:00 GMT). Current expectations are for the Fed to raise interest rates by 25 basis points and give a dovish narrative at the press conference. Any change from expectation will see the US dollar, and cable, move sharply.

GBP/USD Daily Price Chart – March 22, 2023

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