The Pound Takes a Dive Despite a Spike in Inflation

·2 min read

It was a busy start to the day for the UK market. Following impressive UK employment figures on Tuesday, UK inflation was in the spotlight this morning.

Pound sensitivity to economic data has intensified as the market looks to second guess the Bank of England’s next move.

Pound Sinks Despite a Spike in UK Inflation

In April, the UK’s annual rate of inflation accelerated from 7.0% to 9.0% versus a forecasted 9.1%. Month on month, consumer prices rose by 2.5% following a 1.1% increase in March.

Wholesale inflationary pressures softened, however. In April, the producer price input index rose by 1.1%, which was in line with forecasts. The index jumped by 4.6% in March, however.

According to the Office for National Statistics,

  • The annual rate of inflation was at its highest level on record.

  • Food and energy prices surged to drive up the cost of living and raise further concerns over the economic outlook.

  • In April, prices for gas and electricity surged in response to the Office of Gas and Electricity Markets (Ofgem) increasing its cap on energy prices.

The Ofgem price cap limits the price energy suppliers can charge households that either use a prepayment meter or are on the “standard variable” energy tariff.

In February, Ofgem announced the cap levels for the period April 1 to September 30 and noted that,

“Those on default tariffs paying by direct debit will see an increase of GBP693 from GBP1,277 to GBP1,971 per year. Prepayment customers will see an increase of GBP708 from GBP1,309 to GBP2,017.”

The result is 12-month inflation rates of 53.5% for electricity and 95.5% for gas.

Fears of an economic recession stemming from an unrelenting upward trend in the inflation rate and household cost-of-living hit the Pound.

Market Impact

Ahead of today’s UK inflation figures, the Pound struck a pre-stat high of $1.25009 before hitting reverse.

In response to the numbers, the Pound tumbled to post-stat and a current-day low of $1.23712 before finding support.

At the time of writing, the Pound was down 0.79% to $1.23917.

This article was originally posted on FX Empire