Lower UK inflation weakens pound

The British pound is losing ground against major global currencies today after February inflation data came in much lower than expected, raising the possibility of a more dovish stance from bankers BoE regarding future decisions on interest rates.

Inflation in the UK slowed to an annual rate of 2,8% in February from 3,0% in January, which is a reading lower than the 3,0% expected by the market. The slowdown in the pace of inflation was also noted in the core data, where the annual dynamics was 3,5%, compared to the expected 3,6% and the previous reading of 3,7%. However, the picture of these data is somewhat distorted by the key price index in the services sector, which remains at a high level of 5%.

However, the market does not live only on CPI data. The Minister of Finance Rachel Reeves is set to announce cuts to its spending plans later in the day, in an attempt to show investors that it can be trusted to fix public finances. On the other hand, the market is wary of this development given that momentum in the UK is not doing spectacularly well, as is also illustrated by today's retail prices data, which fell sharply.

However, this does not change the fact that the forecasted increase in energy prices and social security contributions may cause inflation to rebound and bring the dynamics above 3,0% in April and around 3,5% in September. This means that in the long term, the prospect of rapid reductions remains very uncertain. However, the lower data on the market has caused a reaction and increased the chances of another reduction in May, which is currently priced in at 80%.

Source: XTB Analysis Department