The pound sterling appreciated against the US dollar on Wednesday afternoon. The UK inflation data was the trigger for the rise.
GBP/USD, for example, rose to 1.3576 from the previous closing level of 1.3533. The dollar index, or its exchange rate against a basket of six major currencies, fell by 0.11% to 95.91.
Inflation in the United Kingdom accelerated in January to a thirty-year high of 5.5%. It is worth noting that analysts had expected a slightly lower figure of 5.4%, which was seen in December. Producer price inflation (PPI) was also above expectations at 9.9%.
Earlier this month, the Bank of England said that it expects inflation to peak at 7.25% in April when the UK's energy bills rise by more than half.
UK 2-year government bond yields hit their highest level since 2011 almost immediately after the inflation data was released.
The acceleration in the consumer price growth indicator is putting strong pressure on the Bank of England, which now has good reason to tighten monetary policy in its country. If that happens, the national currency would receive additional impetus for strong growth. By the way, the British regulator has already increased the country's interest rate twice, namely in December and February. As of today, it stands at 0.5% per annum.
Financial markets forecast that Bank of England interest rates will rise to 2% by the end of this year, although most experts are confident that they are unlikely to approach this level.
Overall, there are quite a few signs in England which indicate that a peak in inflation is approaching. One of the main ones is the slowing of the producer purchasing price index to 13.6% y/y in January for the second month running. In the previous two months, the index was 13.9% and 15.2%. This is an early indicator that suggests that there will be less pressure on producers from commodity prices going forward. This process is intended to progressively cool consumer inflation in the coming months. By the way, the Bank of England itself has stated that it does not expect the country's inflation rate to return to its 2% target before the start of 2024.
In the meantime, against the background of weakening geopolitical tensions, risk appetite again prevails in the markets, causing the greenback to lose its upside and noticeably weaken against the euro. Russian news agencies, citing diplomatic sources, reported on Wednesday that the withdrawal of troops from the regions, including Crimea, would take about 3-4 weeks. Although the global market remains concerned about the situation on the border with Ukraine, the dollar as a safe haven asset is still losing its appeal for most investors on Wednesday.