Pound Sterling turns volatile against US Dollar as UK inflation cools down expectedly
- The Pound Sterling demonstrates high volatility against its major peers as UK CPI growth has cooled down in line with estimates.
- UK’s headline inflation dropped to 3% YoY as the BoE projected in its policy meeting earlier this month.
- Investors await FOMC Minutes, UK Retail Sales and flash PMI data.
The Pound Sterling (GBP) trades highly volatile around 1.3560 against the US Dollar (USD) during the European trading session on Wednesday, following the release of the United Kingdom (UK) Consumer Price Index (CPI) data for January. The Office for National Statistics (ONS) has reported that inflationary pressures have cooled down expectedly.
UK’s headline inflation has dropped to 3% Year-on-Year (YoY), as expected, from 3.4% in December. The core CPI – which excludes the volatile components of food, energy, alcohol and tobacco – grew expectedly by 3.1%, slower than the previous reading of 3.2%. Month-on-month (MoM) headline inflation has declined 0.5% expectedly after growing 0.4% in December.
In the policy meeting earlier this month, the Bank of England (BoE) stated that price pressures would ease to around “3% in Q1 2026, and closer to 2% in Q2".Soft UK CPI data is expected to prompt dovish BoE expectations for the March policy meeting.
Investors brace for more volatility in the British currency as the UK Retail Sales data for January and the preliminary S&P Global Purchasing Managers’ Index (PMI) data for February are scheduled to be published on Friday.
Meanwhile, the US Dollar (USD) trades slightly higher ahead of the release of the Federal Open Market Committee (FOMC) Minutes at 19:00 GMT. During the press time, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, is up 0.12% to near 97.22.
This week, investors will also focus on the United States (US) preliminary Q4 Gross Domestic Product (GDP) data, which will be released on Friday.
Inflation FAQs
Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.
The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.
Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.
Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it. Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.
Author
Sagar Dua
FXStreet
Sagar Dua is associated with the financial markets from his college days. Along with pursuing post-graduation in Commerce in 2014, he started his markets training with chart analysis.
