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What the UK & US inflation figures mean

GBP v EUR loses nearly 0.5% on the day so far with GBP v USD down 1%..

The Pound has lost what it made yesterday after both UK & US inflation releases surprise markets. The swings don't really feel justified in our opinion as they were rather small misses, but it just goes to show how much of a grip interest rates have on the market currently. 

Yesterday saw the US core inflation rate remain at 3.9%, where the market was expecting a fall to 3.7%. The headline inflation rate dropped to 3.1% (from 3.4%), but again the market was expecting more of a fall to 2.9%. Most economists see the figures as a blip and expect a downshift again in the months again.

In any case, the Dollar rose sharply across the board following the news, amidst a re-calibration in market expectations for a Fed rate cut in the first half of 2024. June is now the call, after months of tips suggesting May would see a 25bp rate cut. A push-back strengthens the USD and the closer together the US & UK rate cuts, the less damage done to the $ versus the £.

The UK's inflation story remained unchanged from December, which was seen as GBP negative. The core and headline inflation reading was meant to rise slightly, but instead inflation undershot expectations. The BoE sees inflation dropping to 2% in April and therefore a summer interest rate cut is on the cards (bad news for GBP).

Talks of a UK recession and deflation is doing the rounds today with some economists now predicting UK interest rates will fall to 4% by year-end. Standard scaremongering at this point, but the underlying figures do suggest both could arrive.

Still, GBP v EUR remains extremely favourable to buy and GBP v USD continues to trade at one of the best times since September last year..