Pound sliding despite inflation drop

UK inflation falls but remains above 10%

The British pound is sharply lower on Wednesday. In the European session, GBP/USD is trading at 1.2069, down 0.88%.

UK inflation continues to fall, although it clearly has a long way to go. January’s inflation dropped to 10.1%, down from 10.5% in December and below the consensus of 10.3%. The core rate dropped to 5.8%, down from 6.3% in December and lower than the consensus of 6.2%. These numbers offer room for a bit of optimism, as does the drop in wage growth on Tuesday. Still, inflation is a bumpy road that will feature highs and lows and market participants would be wise not to make decisions based on one release. With headline inflation still in double digits, the Bank of England will have to continue raising rates, with the most likely scenario being a 25-basis increase at the Mar. 22 meeting.

In the US, inflation in January ticked lower to 6.4%, down from 6.5% but higher than the forecast of 6.2%. It was a similar story for the core rate, which dropped from 5.7% to 5.6% and was above the forecast of 5.5%. Inflation is still falling but the trend may be stalling, which will provide support for the Federal Reserve’s hawkish stance.

After the US inflation release, several Fed members reiterated the “higher for longer” theme. Fed members Barkin, Logan and Harker all had a similar message that the Fed would likely raise rates if inflation did not fall fast enough. The Fed has projected a federal funds rate of 5% to 5.5% by the end of the year, but given the strong economy and high inflation levels, there have been forecasts of a terminal rate as high as 6%.

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GBP/USD Technical

• 1.2180 has strengthened in resistance as GBP/USD is down sharply. 1.2304 is the next resistance line
• 1.2071 and 1.1947 are providing support