Tue, Jan 31, 2023 @ 17:00 GMT
HomeContributorsFundamental AnalysisPound Rally Continues as US Consumer Inflation Sags

Pound Rally Continues as US Consumer Inflation Sags

The British pound continues to head upwards and has posted gains for a fourth straight session. GBP/USD has gained 1.4% since Friday. In Wednesday trade, GBP/USD is trading at 1.4206, up 0.22% on the day. On the release front, British Manufacturing Production disappointed with a decline of 0.2%. This missed the estimate of a 0.2% gain. Britain’s trade deficit narrowed to GBP -10.2 billion, beating the estimate of GBP -12.0 billion. This marked the lowest deficit since October 2016. In the US, CPI declined 0.1%, shy of the estimate of 0.0%. This marked the first decline since May. Core CPI remained unchanged at 0.2%. Later in the day, the Federal Reserve will release the minutes of the March policy meeting.

The tariff spat between the US and China appears far from over, but both sides have lowered the rhetoric over the trade battle which has roiled the markets in recent weeks. Investors are breathing a sigh of relief after Chinese President Xi Jimping sent out a conciliatory message on Tuesday. Xi was speaking at a development conference in China, and promised to lower tariffs on vehicle imports into China. This has been a major sticking point between the US and China, with President Trump complaining that China has a 25% tariff on US vehicle imports, yet the US only charges 2.5% on Chinese vehicles. Xi added that China was looking to solve issues through dialogue rather than confrontation, and the markets are hoping that the US and China can avert a trade war, which could drag down the global economy.

Where is the Bank of England headed? The bank does not meet for a rate meeting until next month, but there is support for a quarter-point rate increase. On Tuesday, BoE member Ian McCafferty urged the bank not to delay in raising rates, and other policymakers support this view. One strong reason in favor of a rate hike is that inflation remains around 3%, well above the 2% target. However, the lukewarm British economy and the dark cloud of Brexit are key reasons why Governor Mark Carney has not been enthusiastic about raising rates. As things currently stand, a quarter-point rate hike seems likely at the May meeting.

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