UK CPI Preview

Unfortunately for UK consumers, the inflation rate is projected to rise further toward 9.3% y/y in Wednesday’s report.

UK

Last week’s hotter-than-expected US CPI report injected a shot of volatility into markets, prompting speculation of entrenched inflation expectations and aggressive moves from the US central bank. This week, traders will run the inflation drama back again, this time with the focus on the UK with Wednesday’s scheduled release of the UK CPI report.

What are the expectations for UK CPI?

After first breaching 9% in May, the headline UK CPI reading came in at 9.1% last month. Unfortunately for UK consumers, the inflation rate is projected to rise further toward 9.3% y/y in Wednesday’s report. Notably, the Bank of England has warned that inflation will likely rise to 11% as the gas cap is lifted again, so we may see continued pressure on UK consumers’ pocketbooks in the coming months:

ukcpi

Source: StoneX, TradingView

That said, the so-called “core” inflation reading, which filters out more volatile energy and food prices, is showing signs of abating, with traders expecting a decline to “just” 5.8% from last month’s 5.9% reading and 6.2% in May.

What will inflation mean for policy?

From a monetary policy perspective, the market has nearly priced in a 50bps rate hike from the BOE in early August, followed by additional 50bps increases in September and November. Another slightly hotter-than-expected inflation reading would be unlikely to shift the BOE from that path in two weeks’ time, but if inflation continues to accelerate into September, a more aggressive tightening path is possible.

Meanwhile, on the fiscal side, many of the frontrunners to replace Prime Minister Boris Johnson are promising sweeping tax cuts, which could stimulate the economy but would risk creating more entrenched price pressures heading into 2023. At a minimum, another elevated inflation reading would return voters’ focus to the cost-of-living crisis and provoke comments from politicians.

How will GBP/USD react?

Generally speaking, elevated price pressures have a negative impact on economic growth because they squeeze consumers’ disposable income and company margins, while simultaneously increasing pressure on central banks to make growth-limiting decisions like raising interest rates.

While a cooler-than-feared inflation reading could theoretically improve the outlook for the UK economy and lead to a bounce in GBP/USD, the technical picture is fairly bleak: Cable is trading in the middle of its year-to-date bearish channel, below all of its relevant moving averages, with no notable long-term support until its COVID lows around 1.1400:

gbpusddaily07182022

Source: StoneX, TradingView

There may be an opportunity to play a short-term bounce in GBP/USD around the CPI report, but unless/until rates can break above this year’s bearish channel in the 1.2200 area, any bounces may be short-lived.

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