The British pound fluctuated around $1.26, hovering near two-month highs as traders assessed key economic data and its implications for monetary policy.
British pound hovers at two-month highs
The annual inflation rate unexpectedly jumped to 3% in January, the highest in ten months and above market expectations of 2.8%. Services inflation also rose to 5%, though it remained slightly below the Bank of England's projection of 5.2%. With inflation moving further from the central bank's 2% target, the data reinforced the BoE’s cautious stance on monetary easing, signaling that rate cuts may not come as quickly as previously anticipated.
Earnings accelerated in fourth quarter
Adding to the hawkish outlook, wage growth data released on Tuesday showed that earnings accelerated in the final quarter of 2024, with wages rising in real terms when adjusted for inflation. The labor market’s resilience, combined with persistent price pressures, has led investors to scale back expectations for monetary loosening. Money markets now anticipate only two interest rate cuts from the BoE this year, which would bring borrowing costs down to 4%, compared to earlier forecasts that had priced in more aggressive easing.
Global factors influence
Meanwhile, broader market sentiment remains influenced by global factors, including the U.S. Federal Reserve’s policy path and ongoing geopolitical uncertainties. The pound’s recent strength reflects growing investor confidence in the UK economy’s ability to withstand high interest rates for longer, though any dovish signals from the BoE in the coming months could shift expectations and weigh on the currency.
