GBP/USD rises as UK inflation higher than expected

The British pound has rebounded after sliding 2.1% over the past week. In the European session, GBP/USD is trading at 1.2461, up 0.28%.

UK inflation drops to 3.2%

Inflation in the UK continues to decline but the March release was not as strong as expected. Inflation eased to 3.2% y/y, down from 3.4% in February but higher than the market estimate of 3.1%. The inflation rate fell to its lowest since September 2021 as inflation eased for food, restaurant and hotels. Monthly, inflation was unchanged at 0.6%, above the forecast of 0.5%.

It was a similar story for the core rate, which dropped from 4.5% to 4.2%, above the market estimate of 4.1%. Monthly, core CPI was unchanged at 0.6%, above the forecast of 0.3%.

The British pound has bounced higher as the stronger-than-expected CPI report could delay plans to lower interest rates. The markets responded by paring the chances of a rate cut in June and have fully priced only 25 basis points in cuts before the end of the year.

The Bank of England’s steep rate tightening has pushed inflation down from double digits, but the final stretch of bringing inflation down to the 2% target could be the hardest part of the battle. Core inflation has proven to be sticky and is more than double the 2% target.

In the US, the Federal Reserve is grappling with a hot US economy and inflation has accelerated in each of the past two months. This has complicated plans to lower rates and provide relief to homeowners and businesses.

Fed Chair Powell delivered a blunt message on Tuesday, stating that “the recent data have clearly not given us greater confidence and instead indicate that it’s likely to take longer than expected to achieve that confidence”. The US economy’s strong performance is putting into question whether the Fed will cut at all this year. The markets have slashed the odds of a September cut, which was a given just a month ago at 93%, have to just 32% at present.

GBP/USD technical

• GBP/USD tested resistance at 1.2463 earlier. Above, there is resistance at 1.2501.

• There is support at 1.2435 and 1.2397.