Inflation rates in the United States have exceeded expectations, with the headline rate reaching 3.0% and core inflation at 3.7%. This development has stirred financial markets, influencing various currency pairs and investor behaviors. The GBP/USD pair remains stable around 1.2600 during the European session, supported by a broad underperformance of the US Dollar. Meanwhile, US President Donald Trump's recent tariff threats have subdued investors' appetite for riskier assets, driving demand for safe-haven bullion to new heights.
Danske Bank's FX analyst, Mohamad Al-Saraf, commented on the inflation data:
"Headline came in higher than expected at 3.0% (cons: 2.8%, prior: 2.5%), core at 3.7% (cons: 3.7%, prior: 3.2%). Services however was a touch lower than expected, meeting the BoE's expectation of 5.0% (cons: 5.1%, prior: 4.4%)."
Source: Mohamad Al-Saraf, Danske Bank's FX analyst
The unexpected rise in inflation was attributed to increases in fuel prices, education costs due to VAT on private school fees, airfares, and stronger food prices.
"The rise in headline was driven by fuel prices, education (VAT on private school fees), airfares but also stronger food prices. Note, this was the final CPI release ahead of the next BoE meeting on 20 March, where markets price 2bp."
Source: Mohamad Al-Saraf, Danske Bank's FX analyst
As the Bank of England prepares for its next meeting on March 20, market participants are factoring in a potential 2 basis point cut. However, Mohamad Al-Saraf suggests the probability of a rate cut in March is low, expecting it may occur in May instead.
"We see the bar as high for delivering a cut in March, amplified by today's release and expect the next cut in May. We stay bullish on GBP FX and expect a more gradual BoE easing cycle relative to peers to support this view."
Source: Mohamad Al-Saraf, Danske Bank's FX analyst
Elsewhere in the currency markets, the EUR/USD pair is holding steady above 1.0450 during European trading hours. Despite this stability, tariff threats from President Trump alongside geopolitical tensions could limit any upward movement for this pair. The US repo rates continue to look more attractive, with bills expected to appreciate, further influencing market dynamics.
The UK services sector has matched the Bank of England's anticipated 5.0% growth rate, bolstering confidence in the British economy. Meanwhile, the EUR/GBP pair has broken firmly below the 0.83 mark due to higher-than-expected inflation figures.
The tariff threats have not only affected currency markets but have also spurred demand for gold as a safe haven. The precious metal hit a fresh all-time peak during the early European session as investors sought refuge from market volatility.