London city skyline

UK inflation hits 30-year high

Lawrence Kaplin
Lawrence Kaplin 20 January 2022

GBP: Muted response

EUR: German inflation surges

USD: Biden blames the Fed

 

Sterling

Sterling initially fell 0.4% versus the euro yesterday following the release of the latest inflation data, as markets have already aggressively priced in multiple interest rate hikes this year. Later in the day, a large positive turnaround in broader market sentiment helped risk currencies to improve, with the pound recovering, posting a near 2-year high against the single currency.

The latest UK inflation data showed the cost-of-living rose at its fastest pace for 30 years, as the prices for food, clothing, furniture and energy in particular soared. The annual increase to 5.4% is expected to climb even higher over the coming months, with the Bank of England forecasting a peak of 6% this year. The growing cost-of-living crisis is forecast to further deteriorate with energy prices set to soar over 50% when the price-cap is increased from April. “The rising costs of food and non-alcoholic drinks are forcing many households to turn to food banks to survive” warned the MD of food retailer Iceland, adding “we are losing customers to hunger”. Along with rising prices, the fall in inflation adjusted wages, rising taxes and reductions in Universal Credit top-us are all set to hit UK households over the coming months. In other news, the political debacle continues, with PM Johnson refusing to answer questions over “party gate” ahead of the official investigation. Growing calls for his resignation came from both sides of the House, with Conservative MP David Davis demanding Boris resign as he told the PM: “You have sat there too long, for all you have done. In the name of God, go!“

No economic data due today. UK Retail Sales data due tomorrow.

 

Euro

The euro had a mixed trading session yesterday following the release of German inflation data which showed the cost of living increased at its fastest pace in 30 years. In response to the data, ECB’s Villeroy reiterated the Central Bank’s determination to do whatever was needed to bring inflation back to their, close, but below 2% inflation target range. Market focus will now switch to this morning’s Eurozone inflation report, as well as the minutes from the recent ECB meeting due later today.

10:00 EZ Inflation; 12:30 ECB minutes.

 

US dollar

The dollar gave back some of its recent gains yesterday as events elsewhere took centre stage. The rise in Bond Yields continued with the benchmark US 10-year hitting a fresh 2-year high. After initially moving higher during yesterday’s trading session the greenback later retreated after a huge turnround in US equities helped improve risk sentiment.

With President Biden’s poll ratings tumbling as the cost-of-living crisis intensifies, he probably wisely chose to pass the buck onto the Central Bank saying, “it’s the Fed’s job to make sure inflation does not become more entrenched”. With no major economic data releases this week, the markets' focus is firmly on next week’s rate setting meeting.

13:30 Weekly Jobless claims; 15:00 US Home Sales.

 

Market rates

Today's Interbank Rates at 08:20 against sterling movement vs yesterday.

Euro €1.199 -
US dollar $1.363 ↑
Australian dollar $1.883 ↓
South African rand R20.80 ↓
Japanese yen ¥155.8 ↑

 

Have a great day.