The pound sterling failed to recover after the release of the UK employment data yesterday, but returned to squirm in European trading today.
Pound sterling failed to recover after the release of UK employment data yesterday, but revived in European trading today (19/January). The release of UK inflation data again outperformed consensus estimates, thus reinforcing expectations for a UK central bank (BoE) rate hike next month.
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| GBP/USD Daily chart via TradingView |
Consumer inflation data showed growth of 5.4 percent (year-on-year) in December 2021. The increase was higher than the consensus estimate of 5.2 percent, as well as higher than the 5.1 percent growth in November. Core inflation data also soared to 4.2 percent, well above the consensus estimate of 3.9 percent. All of this will increase pressure on the BoE to raise interest rates again at its February 2022 policy meeting.
The BoE raised interest rates for the first time in this "rate hike" cycle on December 16. However, the UK's continued high inflation rate has made market participants predict further rate hikes more aggressively. The latest market data shows that the BoE rate projections will gradually increase from 0.25 percent today to 1.25 percent by the end of 2022.
Will the BoE rate expectations trigger a rally in the pound sterling? Analysts differ on this matter.
Some analysts believe that the current pound rate has taken into account too many "BoE rate hike" projections, so that there is minimal room for the sterling to strengthen to a higher range. However, other analysts think sterling could go higher this year, especially against currencies with prospects for lower interest rates.
"A lot has already been priced in for the BoE cycle, but we think it's too early to fade the GBP rally in the middle of a BoE cycle that the market has fully priced in. Similarly, we think it's too early to fade. on the (current) dollar rally," said ING's Chris Turner.
ING expects the BoE to raise interest rates by 25 basis points at the BoE MPC meeting on 3 February 2022. They also expect EUR/GBP to continue advancing towards the 0.8270/80 area.
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