UK inflation drives pound higher

The FTSE is pushing lower, after an inflation fuelled rise in sterling sparks fears for exporters.

  • European markets await next big fundamental driver

  • UK inflation breaks 2% target, heaping pressure on the BoE

  • Brexit negotiations likely to bring significant GBP volatility

Early FTSE gains have faded in morning trade, as the general malaise that has dominated this week seems to be continuing once more. The early FTSE losses have been ramped up after a sharp rise in sterling as a result of this morning’s inflation figure. In the wake of last week’s FOMC rate hike and Dutch election result, it feels as though markets will focus on shorter term economic releases until the next big topic comes into view. In Europe, the upcoming topics to focus on are clear, with the commencement of Brexit negotiations next week, followed by the French election in a month’s time.

UK inflation punched through the 2% target with ease in February, with the 2.3% rate of year-on-year price growth representing the highest level of headline CPI since 2013. Probably more importantly, the rise in core CPI to 2% is hugely significant given that this rules out the BoE’s ability to excuse away this inflation rise as being temporary or driven by oil prices. Carney’s indication that a rate rise is as likely as a cut highlights that the BoE are stuck between their desire to ease in the face of Brexit headwinds, and the need to tighten to keep inflation down.

We are now just 8 days from the moment article 50 is triggered, with 29 March sparking a flurry of negotiations in Brussels. The fact that article 50 will be enacted is unlikely to be a significant knock to market confidence as a whole. However, what European traders will be wary of is the likely flow of leaks coming out of negotiations, with many of the remaining 27 EU members vying to prize jobs away from the UK. Comments from EU commissioner Jean-Claude Juncker that the UK will be punished to show other members not to leave serves to highlight the battle faced by UK negotiators.

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