Pound edges higher as UK CPI rises

UK inflation rises to 5.5%

UK consumers continue to feel the cost-of-living squeeze, as inflation climbed to its highest level in 30 years. January CPI rose to 5.5% y/y, up from 5.4% in December and ticking above the consensus of 5.4%. Similarly, Core CPI rose from 4.2% to 4.4% and beat the forecast of 4.3%. Inflation is expected to continue to accelerate, with predictions that it will hit 7% come April.

These inflation numbers, together with the rise in wage growth are putting more pressure on the Bank of England to tighten its policy. The bank is widely expected to raise rates at the March meeting to 0.75%, which would mark three consecutive rate hikes for the first time in the BoE’s history. Inflation is expected to ease in the second half of the year, which means that the BoE might raise rates again in May but could then take a pause.

The Federal Reserve also has been dealing with the headache of surging inflation, which has forced the central bank to become more hawkish and abandon its stance that inflation is transitory. The Fed expects inflation to ease in the second half of 2022, but cannot afford to sit idle and plans to raise rates in March. The only question is the extent of the hike – the CME’s FedWatch has pegged a 57% chance of a 50-basis point hike and a 43% likelihood of a 25-basis point hike. It’s clear to all that this will mark the start of a series of hikes this year, although the exact number will depend on economic developments.

The crisis on the Ukraine/Russia border has eased but the situation remains very tense. Russia has apparently moved some troops away from the border but President Biden said that this has not been verified and warned that an invasion remains “distinctly possible”.  Biden has warned Russia that it would face severe consequences if it invades, and the ball is squarely in Moscow’s court as to what happens next.

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GBP/USD Technical Analysis

• There is resistance at 1.3640 and 1.3719
• There is support at 1.3487 and 1.3413

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