The latest inflation data in the UK stabilized both the pound sterling and the US dollar. This is because the increase in inflation has caused a risk-off sentiment.

On Wednesday (April 19th), the pound sterling strengthened following the release of higher-than-expected UK inflation data. GBP/USD strengthened to 1.2440, while EUR/GBP fell to 0.8800. However, the data also revived a risk-off sentiment and pushed for strengthening the US dollar against other currency pairs.

gbpusdGBP/USD Daily chart via TradingView

The inflation rate in the UK for March 2023 exceeded expectations in all categories. The main inflation data on an annual basis increased by 10.1% compared to the consensus estimate of 9.8%, although it was lower than the increase of 10.4% in the previous period. Core inflation remained at a rate of 6.2% since last month, while the consensus expected a decrease to 6.0%.

All inflation figures exceeded consensus estimates and were higher than the projections in the Monetary Policy Report released by the Bank of England (BoE) in February. As a result, the market is confident that the BoE will raise interest rates at least once more this year.

"Yesterday's wage data was strong and higher than expected and today's CPIs were higher than expected...so it's looking more likely that the BoE will hike by 25bps," said Francesco Pesole, FX Strategist at ING, who said in the short term this improves the outlook for the pound.

The impact of this inflation data on the pound sterling is relatively limited, as market participants have fully priced in further rate hikes from the Bank of England (BoE) since the announcement of UK employment data yesterday. Instead, the data has reignited risk-off sentiment, which is favorable for the US dollar.

"Risk sentiment turned negative during the European morning session, with zero- and low-yielding assets taking the brunt of the sell-off as bond yields have continued to extend their recovery," said Fawad Razaqzada, market analyst at City Index.

"It looks like UK's 10%+ CPI reading was the culprit. This has revived worries that interest rates will remain high for longer in the UK – and Europe."

Following the release of UK inflation data, the risk-off sentiment pushed up US Treasury yields and stabilized the US dollar index (DXY) within a consolidation range of 101.60-102.20. The greenback strengthened against all major currencies except for the pound.

Eurozone inflation data released a few hours after the UK showed more moderate performance. The growth of the main inflation rate slowed from 8.5% to 6.9%, in line with consensus estimates. The monthly core inflation rate exceeded expectations, but still matched consensus on an annual basis. Overall, the conclusion was neutral for the euro exchange rate and expectations for ECB interest rates.