UK Inflation remains sticky at 4% – will this help the pound?

UK inflation is holding steady at 4% according to data released by the Office for National Statistics. Last months inflation data also posted at 4% which shows inflation is remaining sticky in the UK. Markets were expecting a slight uptick again so a flatline is better than expectations for UK mortgage holders.

Sterling exchange rates have largely remained buoyant following the release as the prospect of interest rate cuts this quarter has decreased. GBPEUR remains within reach of the 19-month high. However, Cable (GBPUSD) exchange rates have come under pressure due to last night’s inflation data from the US. US inflation is also remaining stubborn and came out at 3.1%, but it is lower than the UK.

Only a matter of weeks ago, markets were pricing in an US interest rate cut in March. However, economic data from the US has remained resilient and supportive of a strong economy. Cutting interest rates too soon while the economy is performing well could cause inflation to balloon. The Fed will likely push back any rate cuts until the data supports it and this could put pressure on the value of the dollar.

Is a UK recession looming?

Sterling has been one of the strongest performing currencies of 2024 and has been largely supported by the prospect of higher for longer interest rates.

GDP (Gross Domestic Product) growth data is released tomorrow morning. GDP is considered the main measure of UK economic activity, and it confirms whether the economy is expanding or contracting. Current forecasts are expecting the data to confirm a technical recession (two consecutive quarters of negative growth) which would put considerable pressure on the value of the pound.

The Eurozone GDP reading is released this morning and is expected to show a slight expansion of 0.1%. If the UK economy is shrinking and the Eurozone economy is growing, sterling could be at risk of a sell-off.

Currently, the pound is in a strong position, but the next 24-48 hours could be pivotal for rates moving forward.

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