The Pound picked up strength yesterday, following the news that UK inflation has not yet eased, according to the Consumer Price Index. Inflation is broadly expected to recede back to 2% this year, and it is likely that the Bank of England is waiting for wage growth to rise above 2.5% before raising interest rates. Today, the International Monetary Fund (IMF) has recommended that the UK prioritise improving its productivity performance. The Pound has slipped to a five-week low to the Euro ahead of a speech on Brexit by foreign minister Boris Johnson. The US Dollar weakened ahead of today’s inflation data due out when the Consumer Price Index (CPI) is released. While inflation is expected to have eased, today’s CPI will be critical since previous hints of rising inflation sparked a global stock market rout. If inflation is unexpectedly stronger, the US Dollar will be likely to benefit by strengthening in expectation of more interest rate hikes by the Federal Reserve.
The Pound rallied against the US Dollar earlier today, due to improved optimism about Brexit transition period negotiations. Sterling lost some strength after the Office for National Statistics (ONS) report showed January retail sales figures came in much weaker than had been expected. For the three months to January, sales increased by just 0.1%, which the ONS said could be “partly attributed to a background of rising prices.” The US Dollar is weakened partly due to investors’ concerns that the US economy may be overheating, or completing a cyclical upturn with a slowdown due to begin ahead. Inflation is accelerating, as was seen in yesterday’s Producer Price Indices, while industrial production is down. Another factor that is weighing on the Dollar is the long-term impact of the deficit that will be created by borrowing to cut taxes for companies in the US budget.