The British pound has reversed directions on Tuesday and is considerably lower. In the North American session, GBP/USD is trading at 1.2436, down 0.48% on the day.
UK food inflation hits 9-month high
The Bank of England has waged a tough war with inflation and managed to push inflation below its 2% target last September, when CPI eased to 1.7%. Since then, inflation has pushed higher and is currently running at 2.5%. The British Retail Consortium price index indicated that food prices jumped 0.5% m/m in January and 1.6% higher than a year earlier.
The BoE held rates in December and meets next on Feb. 6, with the markets expecting a quarter-point rate cut. Higher inflation will complicate the central bank's plans to lower rates and may result in a slower pace of easing. The BoE's primary goal is still to keep inflation contained and it has to be mindful of the upside risk of inflation. Energy costs are rising as the energy cap was raised on Jan. 1. As well, the budget has added to employment costs by increasing employers' national insurance contributions and a hike in the minimum wage. These steps could result in firms raising prices which would boost inflation.
Investors will be looking for some insights into the BoE's rate plans from Governor Bailey when he testifies before the Treasury Select Committee on Wednesday. It was just last month that Bailey hinted that the BoE could trim rates four times in 2025. With inflation stalling, however, that scenario appears to have been too rosy and two rate cuts seems more realistic, barring an unexpected drop in inflation.
The US dollar is showing broad strength today, after US President Trump said on Monday that he would impose tariffs on steel, aluminum and copper imported to the US. Trump reiterated that he plans to levy a baseline universal tariff on all imports. Trump's tariff plans would likely raise inflation and could lead to trade wars which would disrupt the financial markets.
GBP/USD Technical
- GBP/USD has pushed below support at 1.2483 and is testing support at 1.2443. Below, there is support at 1.2386
- 1.2540 and 1.2580 are the next resistance lines
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