UK inflation drops below 8% for the first time in over a year, sparking hope that the worst may be behind us. Core inflation, a crucial metric for the Bank of England, also decreased to 6.9%.
With signs of a softening job market, the Bank might choose a more modest 0.25% rate hike in August, though a larger 0.50% increase remains a real possibility. Despite the positive data, inflation still significantly overshoots the 2% target. Markets now predict the peak interest rate to be just above 5.75% by year-end. Nevertheless, the Bank faces the enormous challenge of reducing inflation without causing long-term damage to the economy.
In the US, all eyes are on the upcoming central bank meeting, where the Fed is expected to implement another 0.25% rate hike, bringing rates to 5.50%. This is likely to mark the peak of this historic tightening cycle, as US inflation is anticipated to fall to 3%.
This week, the European Central Bank is also convening, with a projected 0.25% rate increase, and further expectations for one more hike in September, reaching the probable peak.
Global market sentiment is impacted by concerns over the strength of the Chinese economy, as growth data continues to disappoint.
On the foreign exchange market, the British pound reached its highest level against the dollar in over a year, touching 1.3150, before retreating due to the drop in UK inflation. Meanwhile, GBP/EUR hit a new year-to-date high of 1.1750 before experiencing a sharp decline towards the 1.1500 level, as the market adjusted its expectations regarding the peak in UK interest rates.
