Market analysis: UK CPI drops to 2%, but BoE unlikely to cut just yet

UK CPI dropped to 2% in May. This is a significant milestone after almost two years of hyperinflation. Many will question whether this means the Bank of England (BoE) can start cutting rates. Whilst Thursday’s meeting may be a bit soon, bets have increased for a September cut.

But one must not forget about core inflation. This figure – which excludes more volatile prices like food, alcohol and energy - rose by 3.5% in the 12 months to May 2024, down from 3.9% in April. Whilst the reading came in line with expectations, it highlights that core sectors of the economy continue to experience price pressures. The services sector specifically has been a key area of inflationary concern in the past year. On a monthly basis, core inflation increased by 0.5%, slowing from 0.8% in April.

The thing is that after two years of continuous price rises a return to 2% CPI just doesn’t seem to be enough. We’ll have to wait until after the BoE’s meeting on Thursday to gauge how the central bank feels about the latest data. Remember also that wage data came in stronger than expected in April, which is keeping market expectations about an August rate cut down to a 30% chance. How these expectations evolve after the meeting will likely influence the performance of UK assets in the coming days. 

For now, GBP/USD seems to have reacted positively to the data with the pair continuing the bullish momentum from the past two days. Overcoming the 20-day SMA at 1.2742 looks like the next target before attempting to move back above the ascending trendline from the April 22 lows, currently at 1.2770. Meanwhile, the FTSE 100 remains trapped below two key moving averages as it lacks the drive to move higher. The soured sentiment in European equities from the political turmoil following the European elections seems to also be limiting the ascent in the FTSE as the UK general election looms. 

GBP/USD daily chart

(Past performance is not a reliable indicator of future results.)