British Pound dips to weekly lows following soft UK inflation figures

GBP/USD hits weekly lows at 1.3410 following UK CPI data.
UK inflation eased against expectations in May, paving the path for a steady BoE monetary policy.
FX volatility remains subdued on Wednesday with all eyes on the Fed's meeting.

Guillermo Alcala FXStreet

The British Pound (GBP) extends losses against the US Dollar (USD) on Wednesday, with the GBP/USD pair hitting a weekly low of 1.3410 at the time of writing. Softer-than-expected UK Consumer Price Index (CPI) figures have provided further reasons for the Bank of England (BoE) to keep interest rates on hold in the coming months, which has hurt speculative demand for the Cable.

Data released by the UK Office for National Statistics earlier on Wednesday revealed that consumer prices grew at a 2.8% year-on-year (YoY) pace in May, unchanged from April, while monthly inflation eased to 0.2%, below the 0.4% expected and well below April’s 0.7% reading. The Core CPI ticked up to a 2.6% yearly growth, from 2.5% in the previous month, but also below the 2.7% anticipated by the market consensus.

Investors are waiting for the Fed

Major currencies have remained trading within previous ranges on Wednesday, as investors await the outcome of the first Federal Open Market Committee (FOMC) meeting with Kevin Warsh as Chairman. Warsh will face the challenging task of guiding the central bank’s monetary policy with inflation well above target and US President Donald Trump’s pressure to cut interest rates.

In this context, the bank will, almost certainly, leave interest rates on hold, and investors will focus on the press release and the economic projections, looking for hints about the central bank's forward path, as the new chair is likely to refrain from releasing his interest rate projections.

Markets, meanwhile, keep a cautious tone, awaiting details from the US - Iran peace deal. Trump said on Tuesday that the Strait of Hormuz will be navigable and toll-free and expressed his wish to put war “in the rearview mirror”. Iranian officials, however, have warned that violations of the ceasefire by Israeli forces in Lebanon might trigger a “hard response” by Tehran.

Economic Indicator

Consumer Price Index (MoM)

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 also the inflation measure used in the government’s target. The MoM figure compares the prices of goods in the reference month to the previous month. Generally, a high reading is seen as bullish for the Pound Sterling (GBP), while a low reading is seen as bearish.

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.

Why it matters to traders?

The Bank of England is tasked with keeping inflation, as measured by the headline Consumer Price Index (CPI) at around 2%, giving the monthly release its importance. An increase in inflation implies a quicker and sooner increase of interest rates or the reduction of bond-buying by the BOE, which means squeezing the supply of pounds. Conversely, a drop in the pace of price rises indicates looser monetary policy. A higher-than-expected result tends to be GBP bullish.

Author

Guillermo Alcala

FXStreet

Graduated in Communication Sciences at the Universidad del Pais Vasco and Universiteit van Amsterdam, Guillermo has been working as financial news editor and copywriter in diverse Forex-related firms, like FXStreet and Kantox.

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