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UK Inflation Hits a 40-year High

Sharp increases in food and fuel prices have pushed the UK inflation up to 9.4%, slightly exceeding the market forecast of 9.3%. This is the closest the inflation rate has been to double digits since 1982. June’s inflation rate increased by 0.3% from May and is amongst the highest rises in the G7 group. The cost of living has increased by 0.8% from the previous month, recording the highest increase since at least 1988 when modern record-taking began.

UK inflation has been on the rise for 9 consecutive months now and the Bank of England (BOE) is expecting it to peak at 11% towards the end of the year when energy prices rise again in the fall. Core inflation, which excludes food and energy prices, stands at 5.8% for June, which is slightly lower than May’s 5.9%.

Traders are expecting that this development will push the Bank of England to tighten its monetary policy. The governor of the central bank, Andrew Bailey, has already confirmed that a 0.5% interest rate hike is an option. "A 50 basis point increase will be among the choices on the table when we next meet. 50 basis points is not locked in, and anyone who predicts that is doing so based on their own view,” he commented. The BOE is scheduled to have a meeting to discuss its monetary policy on the 4th of August.

GBP/USD has not been able to maintain its bullish momentum this morning. Soaring US stock prices and gloomy inflation rates in the UK have allowed the greenback to recover some of its losses. If the US Dollar Index corrects upwards, it may add pressure on the currency pair.

GBPUSD - 20.07.2022.jpg

However, traders will be keeping an eye out for US Existing Home Sales data which is scheduled to be released later today. If the numbers fall short of expectations, it could limit USD’s potential recovery.

Despite coming close to double-digit inflation, some economists remain hopeful, explaining that the rising inflation is mainly concentrated from food and fuel. This means that core inflation, which is actually decreasing, has a chance of coming back down to the targeted 2% in a year or so.

For now, markets will keep an eye on the price of GBP/USD which could drop if the US Dollar Index corrects itself. This will largely depend on the figures released from the Existing Home Sales later today.

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