It was a strong day for the euro on Tuesday, with the currency climbing 0.2% on the pound and over 0.6% on the dollar. Sterling continues to gain on the dollar, up another 0.5% in yesterday’s trading, and more than 1% than this time last week. Though this morning’s higher than forecast inflation rise may put an end to that.
The UK’s Office for National Statistics revealed that inflation rose more than 3.5% in April, above even the 3.3% predicted by analysts. The increase was pushed by the bundle of price hikes that saw the month dubbed ‘Awful April’ – water bills, energy costs, council tax and transport fares all jumped at the start of the new tax year.
While the Bank of England predicted inflation would increase to as high as 3.7% by September before trending downwards to 2%, the above-expected numbers put extra pressure on the Bank’s upcoming Interest Rate decisions. Just yesterday, the Bank of England’s chief economist Huw Pill warned the Monetary Policy Committee was cutting rates too quickly and not rigorously tackling inflation.
On Tuesday, US President Donald Trump visited Congress to put pressure on Republican lawmakers to pass his “big, beautiful bill” that will extend the tax cuts he passed in 2017 and reduce government spending further.
The uncertainty around whether the bill will pass and the impact it would have if was ratified may be behind the dollar’s decline this week. After all, the push to cut taxes comes days after Moody’s downgraded the US’s credit rating to AA1, increasing the government’s borrowing costs.
The euro appears to have benefitted from the market’s expectations of high UK inflation and the uncertainty around the US tax bill. Tuesday’s rise on the dollar and pound wasn’t linked to any major positive economic data release or policy announcement, and it may well have been that stability that attracted traders.
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