GBP/USD plunged to a low of 1.2535 on the heels of the release of very disappointing UK inflation data.

The Pound Sterling briefly strengthened yesterday thanks to the release of good wage growth data in the UK. However, GBP/USD immediately collapsed again due to the release of superior US inflation data. The Cable duo slumped further today (14/February) to as low as 1.2535 due to the release of very disappointing UK inflation data.

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UK Consumer Price Index (CPI) growth came in at -0.6% in January, falling twice as fast as the consensus estimate pegged at -0.3%. The annual inflation rate remained at +4.0%, whereas a Reuters survey had forecast an increase to +4.2%.

Analysts expect the UK inflation rate to weaken further in the coming months. As a result, the pound sterling exchange rate fell against various other major currencies including the euro and yen.

"The pound has weakened across the board. Sterling had climbed higher against most other currencies yesterday following the UK employment report, which showed wage growth slowed by less than expected, and the unemployment rate unexpectedly fell to 3.8% against a forecast of 4%. However, the weaker inflation figures are likely to help pave the way for further rate cuts by the BoE, thus reducing the pound's yield advantage," said George Vessey, Principal FX Strategist at Convera.

The figures reinforced market expectations for an early Bank of England (BoE) rate cut in June. However, there is still plenty of uncertainty. LSE Group data currently shows that the market is pricing in a 51% chance for a rate cut scenario starting in June, as well as a 75% chance for a cut starting in August.

Traders' attention will next turn to the scheduled release of UK Gross Domestic Product (GDP) data tomorrow. If the actual GDP data is also weaker than expected, Pound Sterling is in danger of crashing - especially against the currently hawkish US dollar.

"Tomorrow's GDP data is expected to reveal that the UK fell into recession at the end of last year. Although (BoE Governor) Andrew Bailey has dismissed it with the expectation that the recession will be shallow and short-lived, there is pressure on the BoE to cut interest rates sooner, and today's CPI data release won't change that much," said Lindsay James, investment strategist at Quilter Investors.