This morning’s inflation data out of the UK saw headline year-on-year inflation rise to 4.0% for December, surpassing 3.9% in November and exceeding the 3.8% market consensus. This marks the first increase since early 2023. According to the Office for National Statistics (ONS), between November and December, alcohol and tobacco jumped from 10.2% to 12.9% and was the largest upward contribution to both CPI and CPIH (this is a more comprehensive measure as it includes owner occupiers’ housing costs and Council Tax), while the major downward contribution was observed from food and non-alcoholic beverages.

Core services CPI

On the core side of things, inflation remained unchanged at 5.1% in the twelve months to December, which exceeded the 4.9% median estimate. Notably, core services CPI also rose to 6.4% for December year on year, against 6.3% prior, which, of course, will concern those at the Bank of England (BoE).

The latest data follows yesterday’s UK jobs numbers, showing unemployment steady at 4.2% in the three months to November and wages for November (3m YoY) falling to 6.8% (including bonuses) and, as expected, at 6.6% for pay excluding bonuses.

GBP/USD

Sterling immediately lifted to the upside against G10 peers; gains were prominent against the Aussie dollar (AUD), the Japanese yen (JPY) and the New Zealand dollar (NZD). Versus the buck, the release sent the GBP/USD moderately northbound, bolstered by the likelihood of the BoE having to keep the Bank Rate in restricted territory for longer than anticipated. According to market pricing (OIS), 131bps of cuts are priced for the year following the release. Evidently, a moderate hawkish repricing was observed; June’s policy meeting is now fully priced for the first rate cut (44bps), whereas prior to the event, May’s policy meeting was all but fully priced in for the first 25bp cut.

The Research Team added a technical post for the GBP/USD yesterday, which remains accurate at the time of writing. A point of note is that although we are higher in early London this morning, the daily chart probed to fresh lower lows in Asia today, consequently signalling an early downtrend for the currency pair.

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