In Wednesday’s European session, the Pound Sterling (GBP) rallied to 1.2750 following the release of the United Kingdom’s (UK) Office for National Statistics (ONS) report indicating a slower-than-expected decline in the Consumer Price Index (CPI) data for April. While UK inflationary pressures remained elevated, they notably softened from March figures, signaling that the Bank of England‘s (BoE) higher interest rates stance is effectively tempering inflation.
The relatively slower decline in UK inflation is anticipated to dampen expectations for imminent BoE rate cuts, with financial markets previously anticipating such measures to commence from the August meeting. Notably, the annual service inflation, a pivotal metric, exhibited a modest deceleration to 6.0% from the previous reading of 6.1%, underscoring its significance as a barrier for inflationary trajectories towards the 2% target.
Speculation surrounding BoE rate adjustments gained traction after BoE Deputy Governor Ben Broadbent’s remarks on Monday, suggesting a potential shift in policy direction in the coming months, as reported by Reuters. Broadbent hinted at the possibility of Bank Rate cuts over the summer if economic conditions align with forecasts indicating a need for less restrictive policies.
In the daily market digest, the Pound Sterling’s ascent to 1.2750 coincides with the release of robust UK CPI data for April. Headline inflation rose to 2.3% year-over-year (YoY), surpassing expectations of 2.1%, albeit registering a decrease from the previous reading of 3.3%. Monthly headline inflation also exceeded estimates, growing by 0.3%, although notably lower than March’s reading of 0.6%.
Furthermore, the annual core CPI data, a key measure for the BoE’s interest rate decisions, expanded by 3.9% (YoY), surpassing the consensus of 3.6%, albeit decelerating from March’s figure of 4.2%. Despite the robust inflationary pressures, the data suggests a trajectory towards the BoE’s 2% target.
Conversely, across the Atlantic, uncertainty looms over the timing of potential interest rate adjustments by the Federal Reserve (Fed). Fed policymakers advocate maintaining current interest rate levels until there is sustainable evidence of inflation declining to the desired 2% rate. While progress in disinflation has resumed after a three-month stall earlier in the year, policymakers remain cautious, awaiting further confirmation of the trend.
The US Dollar (USD) maintains a sideways trend amid the Fed’s hawkish stance on interest rates, which supports the downside, while speculation regarding potential rate cuts from the September meeting curbs the upside. Market focus now shifts to the Federal Open Market Committee (FOMC) minutes for the May meeting, expected to provide additional insights into the interest rate outlook.
