Summary:

• GBP September 2022 YoY inflation, beat market expectations.
• Affect on the GBP.

GBP CPI Inflation

The market has predicted a CPI YoY inflation figure of 10%, the actual data came in at 10.1%, which was hotter than expected by the market.

The inflation reading is likely to set off expectations on the future interest rate hiking path of the Bank of England (BoE). The higher than expected inflation reading is likely to set investor confidence in the direction of a continuing hawkish BoE interest rate hiking cycle, causing investor confidence in the GBP to increase and therefore strengthening the pound sterling currency.

Following some fresh concern in the UK bond markets on Tuesday, the British Pound's impressive run came to an abrupt end. Following the Bank of England's forced denial that it would further delay its program of quantitative tightening, UK gilts declined and the yield they offered increased. 

This is the procedure through which it sells the gilts it acquired as part of its quantitative easing strategy back to the market. A crucial element of the Bank's strategy for normalizing monetary policy as it battles inflation is quantitative tightening. After the recent instability in the bond market, The Financial Times reported on Tuesday that the Bank was prepared to postpone the program.

Effect of the CPI reading on the GBP

It is no secret that the pound sterling has had a tough year on the forex markets. The near-term outlook for the pound has significantly improved, according to foreign exchange strategists at BMO Capital, and more gains are possible if the UK leadership is changed in the next two weeks.

The Kwarteng catastrophic "mini-budget" in September, which offered the largest tax cuts in 50 years at a time when the U.K. economy is already experiencing significant inflation, is blamed by the government for the turmoil the pound sterling is currently experiencing. The Bank of England had to step in to prevent the collapse of a significant portion of the U.K. pension system after Kwarteng's actions drove the pound to an all-time low against the dollar and set off a sell-off in government bonds.

The initial market reaction showed a weakening in the GBP/USD currency pair, and a strengthening in the EUR/GBP currency pair as investors weigh GBP prospects.

Sources: poundsterlinglive.com, investing.com