Excel Currencies Blog

BoE may be heading towards a 5% interest rate..

The Pound has so far surprised many this week after hotter than expected UK data. Wages blasted past consensus, people in employment exceeded expectations by 100k and inflation defied the odds by staying in double-digit territory. Collectively, this points to the BoE having to do more on interest rates, which are now being tipped to reach 5% during the summer. 

Starting with the main reading of inflation then and a strong 10.1% was lower than the previous 10.4%, but not where economists had expected to see it at 9.8%. Core inflation (the main data the BoE would use) didn't budge from February's release and so all but secures a 25bp rate hike next month from the BoE (good news for £). 

The BoE would have wanted to see a clear slowdown in labour numbers to be convinced domestic inflationary pressures are cooling too. That of course is still yet to happen and so more obviously needs to be done. The PMI's & retail sales number are still to be released, however, the 'damage' has already been done in determining what the central bank needs to do.

It means GBP keeps its crown as the best performing G10 currency this year (for now) and continues its historically 'purple patch' run in April. In general though, Q2 has been a poor quarter for Sterling and so caution is advised. Collectively, May & June has seen the Pound fall every year since 2016..

That being said, the UK/£ has surprised pretty much everyone this year, so who actually knows what will happen next!