When are the UK CPIs and how could they affect GBP/USD?

The UK CPIs Overview

The cost of living in the UK as represented by the Consumer Price Index (CPI) for May month is due early on Wednesday at 06:00 GMT. The inflation numbers will be the key for GBP/USD pair as traders look for signs of recovery into the price pressure following the easing of lockdown restrictions. Also making the data important is the recently mixed performance of British catalysts ahead of Thursday’s BOE.

The headline CPI inflation is expected to arrive at 0.5% on an annual basis, softer than the previous 0.8%. The Core CPI that excludes volatile food and energy items is likely to have receded by 1.3% YoY last month compared to the previous rise of 1.4%.

In this regard, analysts at TD Securities said, "we're looking for core CPI to hold steady at 1.4% y/y in May, leaving us slightly above consensus expectations for a drop to 1.2% y/y. We've seen some fairly strong m/m services inflation prints across other European countries that have already reported their May inflation data, so think that we could also see a bit more strength in the UK m/m core print. Although there's of course a ton of uncertainty around these measurements through the lockdown. For headline CPI, we're in line with consensus in looking for a decline to 0.6% y/y."

Deviation impact on GBP/USD

Readers can find FXStreet's proprietary deviation impact map of the event below. As observed the reaction is likely to remain confined between 15 and 80 pips in deviations up to 2 to -3, although in some cases, if notable enough, a deviation can fuel movements of up to 120 pips.

How could it affect GBP/USD?

By the press time of pre-London open on Wednesday, GBP/USD bounces off the intraday low of 1.2542 to 1.2553, down 0.16% on a day, while printing a two-day losing streak. The pair’s recent weakness could be attributed to the broad US dollar recovery as well as receding risk-on sentiment, backed by the fears of coronavirus (COVID-19) wave 2.0. Additionally, mixed economics and the BOE’s readiness to act to combat the virus measures offer extra weakness to the pair.

As a result, below-forecast UK price pressures data can weigh on the pair’s recent recovery. However, any surprises following the footsteps of the Unemployment rate might not hesitate to probe the late-April high surrounding 1.2645.

FXStreet’s Yohay Elam expects the British currency’s fall, except for a surprisingly upbeat CPI, ahead of the BOE:

If inflation falls too fast, real interest rates would cease to become accommodative – with borrowing costs exceeding price rises. That could lead the BOE to move in that direction. For the pound to rise, CPI would need to hit the sweet spot of between around 0.3% and 1% – showing that inflation is low and that more QE would help. If inflation surprises with over 1%, it could result in less stimulus from the BOE – perhaps under £100 billion in new funds, thus sending sterling down. On the other extreme, CPI that is close to 0% – and especially negative CPI, deflation – would already raise the specter of negative rates, potentially punishing the pound. 

Key notes

UK Inflation Preview: Sterling needs Goldilocks CPI to rise ahead of the BOE

GBP/USD Forecast: Mixed UK employment data failed to underpin Pound

GBP/USD Price Analysis: Multiple supports question pullback from 200-day SMA

About the UK CPIs

The Consumer Price Index released by the Office for National Statistics is a measure of price movements by the comparison between the retail prices of a representative shopping basket of goods and services. The purchasing power of GBP is dragged down by inflation. The CPI is a key indicator to measure inflation and changes in purchasing trends. Generally, a high reading is seen as positive (or bullish) for the GBP, while a low reading is seen as negative (or Bearish).