The pound sterling exchange rate strengthened in European session trading on Wednesday (March 22). Market participants should thank to a rapid rise in the latest British inflation data.
The GBP/USD even soared around 0.6% to a daily high range of 1.2297. However, there are some major threats that could weigh on the next movement of the pound sterling.
UK inflation data posted an increase of 1.1% for month-over-Month in February 2023. That was far exceeding the consensus estimate of only 0.2% (Month-over-Month).
This growth marks a very rapid increase compared to the inflation rate of 0.4% for month-over-Month) in the January period. Britain's inflation rate on an annual basis also skyrocketed from 10.1% to 10.4%.
The Analysts Hope BOE to Raise It’s Rates Again
That number was further away from the target set by the Bank of England (BoE). Most analysts expect this high inflation rate to prompt the BoE to raise interest rates again at its policy meeting on Thursday.
The provisional consensus expects the BoE to raise interest rates by another 25 basis points. The re-acceleration of CPI inflation in February may be enough to tilt the BoE towards raising interest rates.
The rates are probably between 4.00% up to 4.25% tomorrow. That depends the recent turmoil in the global banking system. This was said by Paul Dales, a Chief UK Economist at Capital Economic.
Not all analysts agree. A small number think the UK's inflation projection will decline again in the coming months, so the BoE does not need to take aggressive steps amid the current global banking instability.
GBP/USD Waits for the Next Fed’s Policy
The slowdown in recent increases in producer output prices, falling shipping costs, and excess inventory in retailer warehouses all signal that core goods CPI will rise more slowly than last year.
This opinion was stated by Samuel Tombs, a UK Chief Economist at Pantheon Macroeconomics. Furthermore, the MPC should be able to predict with confidence.
It is that CPI inflation will fall sharply over the rest of the year. Perhaps that even back to its 2% target, thus sparing them from raising rates and Further significant Bank interest.
This uncertainty hindered a further rally in the pound sterling. In addition, GBP / USD is also vulnerable to being affected by the Fed's interest rate decision which will be announced later in the evening.
Elsewhere, EUR/USD Position is Getting Higher
The Fed is now facing the same dilemma as the BoE. Those are between raising interest rates to control inflation or putting the brakes on a rate hike to maintain financial stability.
EUR/USD positions continued to rise until they approached the threshold of the 1.0800s at the beginning of the European session on Wednesday (March 22). That pair has been reaching their highest level since mid-February.
Two reasons underlie the strength of the euro. Those are the ECB's hawkish stance and the turbulence of interest rate expectations.
The European Central Bank (ECB) last week raised interest rates by 50 basis points. Meanwhile, that’s reiterating its intention to raise them again in the coming months to combat inflation.
Inflationary Pressure is Still Strong
In fact, the meeting to discuss interest rates was held just one day after the Credit Suisse crisis emerged. The market appreciated the ECB's hawkish stance by pushing the euro exchange rate to higher levels in various currency pairs.
Moreover, ECB officials have also tirelessly expressed hawkish rhetoric on various occasions. The head of the Bundesbank, Joachim Nagel, yesterday told that the battle against inflation is not over. He stressed that inflationary pressures are still very strong and widespread in the economy.
While ECB officials were adamant in providing hawkish assurances to the public, market participants instead questioned the Fed's interest rate expectations. This situation is favorable for the euro which usually acts as a "funding currency". That is; the currency is sold in carry trade transactions.
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