British pound stumbles amid inflation concerns and global economic uncertainty

The British pound tumbled against major currencies on Wednesday, shedding 0.3% against the US dollar, trading at $1.2106, and falling by the same degree against the euro at 87.03 pence. This decline followed the release of data from Tuesday, indicating that UK inflation unexpectedly held at 6.7% in September. The unanticipated stability in inflation rates has raised concerns among traders, hinting at the possibility of another rise in interest rates.

Earlier on Tuesday, the British pound (GBP/USD) had shown a promising 0.19% increase against the US dollar, reaching $1.2205, immediately after the inflation data was released. However, these gains were short-lived, as the dollar gained momentum due to rising Treasury Yields, causing the pound to lose its ground.

Analysts have pointed to the pound’s sensitivity to global risk conditions, with ongoing concerns about a potential energy price spike due to the crisis in the Middle East putting further pressure on the currency. Nicholas Rees, an FX market analyst at Monex Europe, noted, “Sterling has been trading with its typical high beta to global risk conditions in recent days,” underlining the currency’s vulnerability amidst global uncertainties.

Furthermore, the possibility of the Federal Reserve keeping interest rates higher for an extended period has contributed to the pound’s decline. Fiona Cincotta, senior financial markets analyst at City Index, explained, “Sterling is falling for a third straight day on dollar strength owing to haven flows, and as U.S. Treasury yields hit a 16-year high, the expectation is that the Federal Reserve will keep interest rates higher for longer.”

On the domestic front, traders are closely analyzing recent economic data. Monday’s wage data revealed a slowdown in the growth of British workers’ regular pay, coupled with a decline in job vacancies. These signs of a softer labour market have increased the likelihood that the Bank of England (BoE) will maintain its current interest rates during its upcoming meeting.

However, the unexpected stability in inflation numbers has complicated the situation for traders. “The modest undershoot on the wages data contrasted with a slight beat on inflation,” observed Rees from Monex, highlighting the conflicting signals from the data.

Despite the mixed signals, money markets are currently placing an 82% chance that the BoE will hold rates unchanged in its forthcoming meeting scheduled for November. Traders are eagerly awaiting the release of UK retail sales data for September later this week and a preliminary read on October business activity next week, hoping for clearer insights into the UK’s economic trajectory amid these uncertain times.