UK inflation runs hot

The sterling showed signs of recovery after the red hot print but the dollars rebound capped gains

By Nadia Elbilassy | @Nadia Elbilassy | 17 January 2024

Market close
  • GBP/USD rallied to 1.2700 on unexpectedly high UK CPI inflation, reducing expectations for BoE rate cuts.

  • UK Consumer Price Index (CPI) rose to 4% annually in December, and Core CPI remained at 5.1%.

  • The dollar strengthened after a 0.6% growth in US retail sales, impacting market expectations and pushing major indices on Wall Street lower.

On the Market Watch!

UK inflation

The GBP/USD pair showed recovery earlier towards 1.2700, driven by unexpectedly high UK Consumer Price Index (CPI) inflation figures. The robust inflation data has diminished expectations for aggressive interest rate cuts by the Bank of England (BoE) in the current year, leading to an upward momentum for the pound.

The UK Consumer Price Index (CPI) rose unexpectedly at an annual rate of 4% in December, up from a 3.9% increase in November, while the Core CPI was 5.1% annually in December, at the same pace as seen in November.

Retail sales

The dollar notched its highest point in a month against a basket of other currencies. Powered by its safe haven demand, and risk off mood especially after Retail sales data grew by 0.6% in December, surpassing the previous reading for November at 0.3%, while the core index recorded a growth of 0.4% up from 0.2%.

The dollar surged to 103.53 following the release of the data, prompting a re-evaluation of market expectations. Investors will closely watch additional Federal Reserve speeches today for more clues on what’s to happen next.

Concurrently, major indices on Wall Street were poised for a decrease at the opening, a reaction to the substantial increase in U.S. retail sales. This, in turn, has tempered expectations for early interest rate cuts in the current year. Despite this adjustment, markets continue to anticipate rate cuts, with a 150-basis points reduction already factored in by the end of 2024.