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Pound falls as UK inflation hits 40-year high

May 18, 2022 05:51AM ET

By: analysis watch

The pound fell against the dollar on Wednesday after data showed UK inflation rose to 9%, the highest level in 40 years.

At 08:46 GMT, the pound was 0.9% lower against the US dollar at $1.23820.

This decline reversed most of the gains made on Tuesday, when the pound touched its highest level since May 5.

Strong labor market data has raised expectations that the Bank of England may need to raise interest rates further, but the latest inflation data reinforces concerns that the threat of a recession may temper how far the central bank can go.

Consumer price growth reached 9% in April, making Britain's inflation rate the highest of the five largest European economies and almost certainly of the Group of Seven, with Canada and Japan yet to announce data for April. Neither is likely to match Britain's price growth.

Streeter says the fact that the US Federal Reserve is expected to be more aggressive in raising interest rates is also increasing the dollar's appeal, further contributing to the pound's weakness as traders flee riskier assets.

Against the euro, the pound rose 0.7% to 84.08 pence.

Brexit-related risks around changes to the Northern Ireland protocol and a potential trade war with the EU are the main risks to the pound, which will trade mostly below $1.23820 against the dollar over the summer, according to a note from ING strategists.

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