UK CPI is set to hold steady at BoE’s inflation target in June – Crypto News – Crypto News
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UK CPI is set to hold steady at BoE’s inflation target in June – Crypto News

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  • United Kingdom’s CPI report will be published by the Office for National Statistics on Wednesday.
  • The annual UK headline and core inflation are expected to hold steady in June.
  • The UK CPI data could revive BoE August interest rate cut bets, rocking the Pound Sterling.

The high-impact Consumer Price Index (CPI) data for June from the United Kingdom (UK) will be published by the Office for National Statistics (ONS) on Wednesday at 06:00 GMT.

The UK CPI inflation report could reinforce expectations of an interest-rate cut by the Bank of England (BoE) in August, with volatility set to spike around the Pound Sterling.

What to expect from the next UK inflation report?

The UK Consumer Price Index is expected to rise at an annual rate of 2.0% in June, at the same pace as in May, sitting at the BoE’s 2.0% target.

Core CPI inflation is likely to stay unchanged at 3.5% YoY in June. Meanwhile, the British monthly CPI is seen rising 0.1% in the same period, compared with the previous increase of 0.3%.

Official data is expected to show that services inflation ticked down to 5.6% in June from 5.7% the month before, according to a Bloomberg survey of economists.

Previewing the UK inflation data, TD Securities (TDS) analysts noted: “Heavy deflation in the energy component should keep headline inflation close to the 2% target in June despite core likely remaining sticky at 3.5% YoY.”

“Focus will continue to be on services, and here we see an unchanged YoY reading as momentum remains strong. Taylor Swift should not have that big of an impact on this print – August is the bigger risk in our view,” the TDS analysts said.

The encouraging UK growth numbers and BoE Chief Economist Huw Pill’s prudent comments last week helped push back against the timing of the BoE’s first rate cut since the COVID pandemic hit the world in 2020.

Data released by the ONS last Thursday showed that the UK economy grew by 0.4% in May, above the expected 0.2% monthly expansion, after stagnating in April.

Meanwhile, BoE Chief Economist Pill dampened expectations of an August interest rate cut on Wednesday. Pill said, “I think it’s still an open question on whether the timing for a rate cut is now,” adding that services inflation and wage growth showed “uncomfortable strength” despite headline inflation falling to the BoE’s 2% target in May.

Money markets currently price in a 50% chance of 25 basis points (bps) cut to the Bank Rate on August 1, down from 62% seen early last week.

How will the UK Consumer Price Index report affect GBP/USD?

Against this backdrop, the UK CPI data will be crucial to determining whether the August rate reduction remains on the table for the BoE. An upside surprise to the headline and core inflation data could support the recent dialing down of expectations of a rate cut next month, fuelling a fresh leg higher in the Pound Sterling. In such a case, GBP/USD could unleash the additional upside toward the 1.3100 level.

On the other hand, GBP/USD could retest the 1.2800 round figure if the UK CPI readings meet forecasts while the services inflation softens significantly. This could bring back bets for the BoE policy pivot in August.

Dhwani Mehta, Asian Session Lead Analyst at FXStreet, offers a brief technical outlook for the major and explains: “GBP/USD’s daily chart portrays overbought conditions, as 14-day Relative Strength Index (RSI) holds near 75, signaling risks of a Pound Sterling correction in the near term.”

Dhwani adds: “The pair needs to find acceptance above the 1.3000 psychological level on a daily closing basis to extend the upside toward the July 19, 2023, high of 1.3045. On the flip side, the immediate support is placed at the March 8 high of 1.2894, below which the 1.2800 resistance-turned-support could be tested. The last line of defense for buyers is seen at the 21-day Simple Moving Average (SMA) at 1.2748.” Dhwani adds.

Economic Indicator

Consumer Price Index (YoY)

The United Kingdom (UK) Consumer Price Index (CPI), released by the Office for National Statistics on a monthly basis, is a measure of consumer price inflation – the rate at which the prices of goods and services bought by households rise or fall – produced to international standards. It is the inflation measure used in the government’s target. The YoY reading compares prices in the reference month to a year earlier. Generally, a high reading is seen as bullish for the Pound Sterling (GBP), while a low reading is seen as bearish.

Read more.

Inflation FAQs

Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.

The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.

Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.

Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it. Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.

 

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