Pound slumps as UK inflation eases, Spring Statement in focus
The pound (GBP) faced selling pressure against its major peers on Wednesday. The British currency weakened following the release of the UK Consumer Price Index (CPI) report for February, which showed that inflation eased at a faster pace than expected due to a significant slowdown in clothing and footwear prices.
The headline CPI rose 2.8% year-on-year (YoY) compared to the 2.9% estimate and the 3.0% increase seen in January. In the same period, the core CPI – which excludes volatile items – rose 3.5%, against the 3.6% expectation and the previous release of 3.7%. The headline CPI grew 0.4% month-on-month after a 0.1% deflation in January, missing the 0.5% estimate.
Inflation in the services sector, which is closely watched by Bank of England (BoE) officials, increased at a steady pace of 5%. Technically, weak inflation data prompted traders to increase bets in favor of the BoE easing monetary policy. However, volatile UK services inflation data could discourage traders from fully backing a BoE rate cut at its May policy meeting.
Investors are bracing for more volatility in the British currency as UK Chancellor of the Exchequer Rachel Reeves is scheduled to deliver her Spring Statement in the House of Commons at around 12:30 GMT. Reeves is expected to cut welfare spending as she vows to avoid tax increases and commits to relying on foreign financing to fund investment only. She is also expected to announce a £2.2 billion increase in defense spending amid uncertainty over the Ukraine war, according to BBC News.
The scenario of lower fiscal spending measures would be unfavourable for the pound as lower government spending results in moderate economic growth, which keeps inflationary pressures in check.
Source: FXStreet
