Pound Sterling is now boasting 2025 highs against the Euro, with the rate being at its best level since January 2nd, due to inflation surprising markets and showing that the rate at which prices rise is now back up to 3%. This crucially has risen 0.5%, but also more alarmingly has beaten expectations of a meagre 0.3% increase. The main factor behind this rise was contributed to airfares not dropping as much as they would usually do in the Post-Christmas period, which should be noted is the weakest January dip in airfares since 2020. The sharp increase in prices is also the highest annual rate we have seen since March 2024.
This release is likely to complicate matters for The Bank of England as they are juggling the fight with inflation along with combatting high interest rates. Last month the governing body reduced rates to 4.5% and there had been hopes that another rate cut could take place in their March meeting. However, any possibility of a rate cut next month has all but been wiped out now as inflation is forecast to continue rising higher, potentially touching 4% at some point this year. This in itself is worrying, bearing in mind prior forecasts saw 3.7% this year as the peak and now it looks increasingly likely that The Bank of England will have to leave rates untouched in order to try and bring inflation under control.
A climb to 3.7% or even 4% shouldn’t be sneered at, as we know Energy prices are set to rise again in the coming months and employers are just over a month away from facing increased costs due to the increase in National Insurance, which when combined together provide a tough outlook economically, and again may well weigh heavy on The Pound.
Moving towards the latter part of the day, we have the release of The Federal Reserves meeting minutes from their previous monetary policy meeting. We expect the minutes to flag a lack of confidence with inflation from policymakers, with the impacts of Trump’s trade tariffs currently unknown. And this lack of confidence with inflation may lead to opinions that the central bank should take a more gradual approach with interest rate cuts. Any commentary leaning more towards a gradual cutting cycle should provide some more breathing room for US Dollar based currency pairs.
GBP/EUR 1.2069 GBP/USD 1.2597 GBP/AED 4.6292
GBP/AUD 1.9815 GBP/CHF 1.1391 GBP/CAD 1.7888
GBP/NZD 2.2007 EUR/USD 1.0426 GBP/ZAR 23.1353