Published: 22/06/2022 By ECAPSterling slipped to a near one week low against the US dollar this morning, as ongoing concerns over the UK’s cost of living crisis continued to dampen sentiment towards the currency. UK inflation edged to fresh highs in May according to data released this morning. Headline price growth rose by a larger-than-expected 0.7% last month (0.6% consensus), lifting the annual number to 9.1% - its highest level in 40 years. Today’s producer price and retail sales inflation numbers also both exceeded expectations. The reaction among currency traders was to send sterling lower, as investors fret that rising prices could trigger a slowdown in UK growth during the rest of the year. Conversely, we think that the data may end up being bullish for sterling should it encourage the Bank of England to raise interest rates more aggressively during the rest of the year. The MPC indicated last week that more forceful action could be on the way at upcoming meetings. Markets are, however, only pricing in around a 60% chance of a 50 basis point rate hike at the BoE’s August meeting.
Chair Powell’s Congress testimony will likely dominate headlines in the next couple of days. We will, however, also be paying very close attention to tomorrow’s preliminary PMI figures out of the G3 economies. Signs of resilience in the data would ease concerns that a sharp slowdown in global growth could be on the way, which may act to support risk currencies against the US dollar.