Sterling has continued its good run this morning following the latest UK inflation figures.

Although the data showed that UK inflation fell sharply last month, it hadn’t dropped as much as the market expected which has lent support to the Pound. The headline CPI figure fell from 3.2% to 2.3% but markets were forecasting it to be closer to the Bank of England (BoE) target and at 2.1%. Importantly, services inflation, which is a key concern for the Bank of England, eased only slightly from 6% to 5.9%.

The report has therefore raised fresh doubts about the timing of interest rates cuts in the UK. The odds of a pause in rates being extended further have increased to the point where the market now views a June cut as clearly premature and is instead wondering if the BoE will now hold off until late summer or even longer (the first cut is not fully priced in until November).

As a result, Sterling has pushed slightly higher today and it has now overtaken the US dollar to become the best performing G10 currency of 2024. This quite a dramatic shift in sentiment versus where we were a couple of weeks ago. The GBP/USD is up nearly 3-cents from where it was trading 2-weeks ago and now trades around a 2-month high. The GBP/EUR has edged up around 1.1% in the past 2-weeks and has also hit a 2-month high, albeit still contained within the familiar range we’ve seen over the past couple of years.

Next up, tomorrow sees the release of the UK, US and Eurozone PMI figures which is followed by Friday’s UK retail sales figures and US durable goods/consumer confidence.

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