Sterling eases after cooler UK inflation but outlook remains challenging

Cable is now down to 1.2908, lower by 0.3% on the day, following the softer UK CPI report here. The pair was trading around 1.2940 before the inflation numbers with traders pricing in ~45% odds of a rate cut for May. On the latter, we’re seeing traders step up their pricing to ~55% odds currently. But are sterling sellers overreaching here?

Headline annual inflation may have dipped to 2.8% but as a reminder, even the BOE expects that to peak at 3.75% in Q3 this year. The push higher in the months ahead is expected to be driven by higher energy costs and regulated tariffs on utilities.

Besides that, there is the expectation that firms will have to raise prices when NICS and NLW increases come into effect next month. And when you add in Trump tariffs and business/investment uncertainty, it makes for a challenging outlook. That even as the spring budget statement later is not expected to include any tax increases.

Meanwhile, the details earlier were also not all too comforting. Core annual inflation remains at 3.5% and that’s still well above what the BOE would like. Then, you have services inflation remaining sticky at 5.0% – unchanged from January. That’s one core metric that the central bank is watching closely and isn’t helping their bid at the moment.

Some analysts are forecasting UK inflation to rise back to around 4% by the time we get to the April or May reports. So, just be wary of that when trying to make sense of the latest data from the UK here. It is not what it may seem just by looking at the numbers alone today.

This article was written by Justin Low at www.forexlive.com.