The Pound has claimed some ground back following the latest UK inflation figures.

The price data came in higher than expected, edging upwards for the first time since last February (4.0% vs. an expected 3.8%), while the core measure (5.1% vs. 4.9%) also increased at its fastest monthly pace since last May. This will be unwelcome news for UK households, who will once again be dealing with elevated prices and the prospect of higher interest rates for longer.

The chances of a May rate cut from the Bank of England are now around 50% versus odds of over 80% last night. The Bank of England may need to see more evidence of a downtrend in both inflation and wages before it can signal lower rates ahead, so we may have to wait until at least the June BoE meeting before we see the first interest rate cut. This could provide some underlying support, and potentially limit any major downside, for Sterling in the short term.

Across the pond, the market’s aggressive bets in favour of Federal Reserve interest rate cuts sent the USD to a one-month high against its major peers yesterday. The US Dollar Index ended the London trading yesterday around its strongest position since the 13th December, as investors are back in doubt to whether the Fed will lower rates after its March meeting.

As a result, the GBP/USD has recovered most of the losses from yesterday and has moved around 0.75 cents higher since the UK inflation release. The GBP/EUR has risen around 0.5% this morning and now trades close to a 5-week high. Next up we have US retail sales this afternoon and UK retail sales Friday morning.

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