Key points

GBP/USD initially surged to an intraday high of 1.2802 on Wednesday after the release of hotter-than-anticipated UK CPI numbers, which added to prospects of Bank of England raising interest rates further.

Later in the session, however, the Sterling erased gains, as traders were concerned the central bank might have limited scope to hike rates to rein in inflation without tipping the economy into recession.

More potential rate hikes could obstruct economic activity and, eventually, could lead to GDP contraction, which would translate into a weaker currency.

The headline consumer price inflation in the UK remained steady at 8.7% in May, a 13-month low, but market consensus had pointed to a slowdown to 8.4%.

Core CPI inflation, which does not take into account volatile items such as energy, food, alcohol and tobacco, was reported to have accelerated to 7.1% in May, or the highest level since March 1992, from 6.8% in April.

The rate still remained well above the BoE’s inflation target of 2%, which fueled concerns about its stickiness.

“If you look at this in context, with the labour market and average earnings increasing 7.2% in April when core CPI was 6.8%, you’ve now got core CPI in at 7.1% – you’re only going to see earnings increase further still and that’s when you start to get those second- and third-round effects and that really gets embedded in the economy,” TraderX strategist Michael Brown was quoted as saying by Reuters.

The Bank of England is expected to deliver a 13th successive interest rate hike at its policy meeting tomorrow, which would bring borrowing costs to a new 15-year high.

After the CPI inflation data release, markets are now pricing in an almost 50% chance of a 50 basis point rate hike.

BoE policy interest rate is expected to peak at 5.75% at the start of 2024.

The yield on 2-year gilts exceeded 5% for the first time in at least 15 years this week.

As of 9:41 GMT on Wednesday GBP/USD was retreating 0.41% to trade at 1.2711. Last Friday the major Forex pair went up as high as 1.2848. The latter has been the pair’s strongest level since April 22nd 2022 (1.3035).

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