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UK CPI Preview: Will inflation return to 2% as the BoE predicts? And how will it affect GBP?

By Daniela Hathorn

15:44, 21 May 2024

The price and forecast information in this article is sourced from Reuters

Wednesday is going to be an important day for UK assets. The latest round of inflation data will be released at 7 am BST and investors are likely going to be paying close attention. The data is expected to prove a turning point for price pressures in the UK economy, which sets up the stage for rate cuts from the Bank of England.

Governor Bailey has professed a few times that he believes the April CPI data will show a significant decline. A poll from Reuters shows headline CPI predicted to come in at 2.1%, which would be the smallest rate of increase in prices since July 2021. If confirmed, this will be a big test of appetite for UK assets, especially for the pound. The FTSE 100 has held up remarkably well in the past few months with improved risk appetite driving the rally in equities, supported largely by expectations of rate cuts.

Reuters predictions for UK CPI (May 22)

It’s been a little trickier for currency pairs, especially those against the US dollar. With the Federal Reserve expected to be one of the last central banks to start cutting rates given the resilience in the UK economy, the dollar has been a focal point for investors. That said, the past month has seen momentum reverse, with the dollar index dropping to a five-week low. But rate differentials still matter, and if the CPI does drop as much as expected, then markets are likely to increase the likelihood of a 25bps rate cut from the BoE at the next meeting in June, which would likely weigh on GBP/USD.

But the expected drop from the current 3.2% is quite ambitious, so we may see the data disappoint. If so, the pound could firm up a little bit more, potentially looking to break beyond 1.28 against the US dollar.

As CPI can be heavily influenced by energy prices, especially with the 12% fall in the regulatory cap on household energy bills last month, following a decline in wholesale gas prices, investors will likely also pay close attention to core inflation, which is predicted to drop from 4.2% to 3.5%. The bigger the drop in the core data, the deeper the pullback in the pound is expected to be.

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GBP/USD daily chart

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

On the chart, GBP/USD is struggling to break above the 61.8% Fibonacci at 1.2718 so the pair is likely to remain bound below this level for the rest of the day, heading into the big release on Wednesday morning. As mentioned above, a stronger-than-expected reading could give GBP enough momentum to push towards 1.28 against the USD, but further resistance is likely to arise beyond this point.

On the downside, the simple moving averages are well-placed to offer support below 1.2630 as is the 50% Fibonacci at 1.2588.

The price and forecast information in this article is sourced from Reuters

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