US Inflation

Tuesday's data showed that US Consumer Price Index (CPI) surged 8.5% year-over-year in March, from 7.9% prior. Core CPI which excludes food and energy prices, registered a more modest increase, to 6.5% year-over-year, from 6.4% in the prior month. Those figures were the highest since December 1981 and August 1982 respectively.

Ahead of the release, White House Press Secretary Jen Psaki had warned of "extraordinarily elevated" Headline CPI for March, due what she called "Putin's price hike" ^[1]. The figures show that inflation is indeed mainly generated by high energy prices and support the White House narrative, as the core reading had a more timid rise than the all-inclusive one.

Federal Reserve governor Lael Brainard reiterated her view that inflation is "too high" and bringing it down is "our most important task", speaking at Wall Street Journal's Jobs Summit after the CPI print. ^[2]

The US Federal Reserve hiked rates in March for the first time since 2018 in order to combat elevated inflation and has hinted at more aggressive action if needed. It also ended it asset purchases and has pointed to a balance sheet reduction, as early as the next meeting in May.

UK Inflation

UK Headline CPI jumped 7.0% year-over-year in March, as today data showed, constituting the highest rate in the National Statistics series which began in January 1997 and the highest in historic modelled series since March 1992.

Last month, the Bank of England (BoE) had delivered its third rate hike in a row, bringing them to 0.75%, reacting to high inflation. It also upgrade its forecasts, seeing Inflation rising to around 8% in 2022 Q2, and perhaps even higher later this year. ^[3]

Wage inflation has been a particular source of worries for the central bank, with Tuesday's figures revealing a 5.4% rise in average weekly earnings (including bonuses) for the three month period ending in February.

The BoE is ahead of its US counterpart in the monetary tightening path, but the last hike was accompanied by a dovish shift in rhetoric. The policy statement had noted that further modest tightening in monetary policy "may be appropriate", a departure from the prior "is likely to be appropriate" hawkish reference.

UK Politics

Market also digest the latest news around what is known as the "Partygate", a series of Downing Street parties that violated the Covid-19 lockdown measures, which mr Johnson had allegedly attended. Prime Minister Johnson disclosed yesterday that he had received a fixed penalty notice from the London Metropolitan Police "relating to an event in Downing Street on 19th June 2020". ^[4]

He offered an apology but resisted renewed calls to resign, despite having broken the law his own government set. Opposition leader Mr Stramer twitted that "Boris Johnson and Rishi Sunak have broken the law and repeatedly lied to the British public. They must both resign".^[5]

The opposition cannot oust the PM, only his own party can do that. Support for such a move does not seem high at this stage, but we will have to see how this plays out.

GBP/USD Analysis

The pair's knee-jerk reaction to yesterday's US CPI was higher, as markets seem to think that inflation may have peaked, something that we have seen with previous releases. This quickly changed though, given the aggressive expectations for the Fed's tightening path and the day ended lower, while today its sets new 2022 lows, trading mixed.

GBP/USD runs its third straight negative week and is vulnerable to further pressure towards 1.2900, although it may be early for a breach of the 50% Fibonacci of 2020 low/2021 High rise (1.2829).

The pound tries today to contain its three-day losses and a push beyond mid-1.3000s would not be surprising, but a strong catalyst would be required in order to challenge the EMA200 (1.3160-70).