Pound Poised for Wild Swings as Inflation Data Could Unwind Dovish

By Yasin Ebrahim

Investing.com – The pound could mount a further recovery against euro on Wednesday, and is poised for wild swings as data showing inflation remains red-hot could renew bets on Bank of England rate hikes.

rose 0.73% to $1.2020.

If the inflation data come in hotter-than-expected – as has been the case in the recent reports – the “BoE rate hike expectations could be fueled again, allowing sterling to recover somewhat further against euro,” {{Commerzbank said in a note}}.

Data on Wednesday is expected to show that the U.K. consumer price index and core inflation is expected to have risen by 0.7% to 6.2% and 5.1% in February year-on-year, respectively, the fastest pace in two decades.

A hotter than expected print could force investors to unwind bets of a less trigger happy Bank of England following the central bank’s dovish rate hike earlier this month.

The Bank of England hiked rates by 50 basis points in March, but “signaled a modest tightening of interest rates over the coming months,” Commerzbank said.

Having an acknowledge an inflation problem, the central bank has taken measures to curb price pressures including hiking its benchmark rate to pre-pandemic levels.

But the central bank is also wary that rising inflation could prove a useful tonic to its inflation problem by denting consumer demand enough to allow price pressures to slow.

The BOE “sees risks that in the end, high inflation might weaken private consumption which in turn could weaken price pressure. That is why it wants to implement cautious rate hikes,” Commerzbank added.

But whether inflation comes in hot again, or underwhelms, it “might well have the ability to move sterling considerably,” Commerzbank added.

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