UK inflation rises faster than expected, pound rallies

The latest UK inflation figures brought a topside surprise, prompting investors to scale back expectations for near-term policy easing from the Bank of England (BoE). The odds of a rate cut at the May meeting have fallen from around 80% to 60%.

The headline consumer price index (CPI) rose to 4% year-on-year in December, up from 3.9% in November but still undershooting the BoE’s 4.6% forecast. Meanwhile, the closely watched services CPI matched policymakers’ projections, rising 0.1 percentage points to 6.4%.

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Gold prices sink as hawkish Fed comments dash rate cut hopes

While the data led to a hawkish repricing, it does little to change the BoE’s overall outlook. Officials will likely reiterate it’s too early to discuss rate cuts, but a cut in May isn’t off the table. By then, the BoE will have full Q1 inflation figures.

The pound rallied nearly 100 pips on the news, spiking from $1.2596 to $1.2697 against the dollar, before retreating as the greenback’s strength continues to weigh.