If GBP/USD jumps ahead of the release, it increases the chances of a "buy the rumor, sell the fact" response – a rapid sell-off once the data comes out, almost regardless of the outcome. I also suggest following the price action 30-45 minutes before publication. Inflation figures are important for the pound but should be taken in the context of recession fears. If underlying inflation accelerates to 6.3% or higher – exceeding the previous month's advance – a knee-jerk reaction in the pound could be sustained for longer.
As with headline inflation, there is room for an upside surprise. Central banks have a limited impact on energy and food prices, but they can influence demand by raising rates, which encourages savings and discourages taking loans.Ĭore CPI is expected to rise by 6% in May after 6.2% in April. There is one scenario in which sterling could continue higher, and that depends on Core CPI. Falling demand means slower price rises down the road, and that obviates the need for rate hikes by the BOE, as mentioned at the outset. But then, investors will likely return to the gloomy reality of a looming recession. How will it impact the pound? I believe it would have a short-lived upside influence on the pound, triggering purchases in the initial, algorithmic-driven knee-jerk reaction. A level of 9.2%, 9.5% or even a level closer to 10% cannot be ruled out. That brings us to the upcoming release: the Consumer Price Index report for May.Įconomists expect 9.1% after 9% in April:ĭata for May from other the US and the eurozone surprised to the upside, and that could undoubtedly be repeated in the UK. The Bank of England already warned of the growing chances of a downturn in May, and in its latest rate hike decision in June it went further in forecasting 11% YoY inflation in October. While a recession will take time to confirm – it takes two months of a squeeze to define a downturn – some suspect the UK is already in recession. Britain's output has last grown in January, and since then it has either been stagnating as in February and March or outright contracting in April. The US leads the world in raising rates, but the UK seems to provide a peek into what happens when inflation chokes the economy. The faster prices rise, the higher interest rates go, and the better the underlying currency can compete with its peers. That is adverse for the pound, as I explain below.Ĭonsumers and investors are focused on inflation and what it means for interest rates. High prices have been curing high prices – the lack of UK growth since January provides evidence that rapid inflation is already cooling the British economy, doing the Bank of England's work for it. It would take a leap in Core CPI to lift the pound.The pound is set to remain disadvantaged against the dollar.The BOE has already set a high bar of 11% CPI in October, setting elevated expectations.
Economists project the UK to report an annual inflation rate of 9.1% in May.