Pound gains momentum as UK inflation breaks 10-month decline

The pound experienced an increase on Wednesday following the release of data indicating a rise in Britain’s annual consumer inflation rate in December, marking the first uptick in 10 months and surpassing expectations. This development challenges the prevailing anticipation of imminent rate cuts by the Bank of England.

Sterling saw a 0.1% uptick to $1.2650, rebounding from a 0.19% decline before the data was unveiled. Against the euro, the pound strengthened, with the euro down 0.16% at 85.93 pence.

Official figures revealed that the annual consumer price inflation in Britain accelerated to 4% in December, up from 3.9% in November, which had been its lowest in over two years. This surpassed the 3.8% reading projected by a Reuters poll of economists.

The data, following unexpected declines in inflation in previous months, may raise concerns at the Bank of England, which had raised interest rates to 5.25% in August to curb rising prices.

In December, core inflation, excluding volatile items, remained at 5.1%, mirroring the rate in November. Services inflation increased to 6.4% in December from 6.3% in November.

Analysts at MUFG noted that the stronger-than-expected readings for both core and services inflation in December are disappointing and may deter the BoE from initiating rate cuts sooner. The UK rate market currently does not fully factor in the first 25 basis points rate cut from the BoE until June.

Market expectations for interest rate cuts in 2024 from major central banks globally, including the Bank of England, will play a crucial role in shaping the pound’s trajectory in the near to medium term. Presently, there is an approximately 80% chance of a Bank of England rate cut in May, while the Fed and ECB are anticipated to make cuts in March and April, respectively. However, Federal Reserve Governor Christopher Waller’s comments and softer economic data from China slightly reduced bets on Fed rate cuts on Tuesday, contributing to a stronger dollar.