The Pound is set to underperform for a period – MUFG

FXStreet Insights Team FXStreet

The UK has just released the June inflation data. Economists at MUFG Bank analyze the British Pound (GBP) outlook after the CPI report.

CPI data should help lean the BoE more toward 25 bps rather than 50 bps

We have a UK inflation print that has come in less than expected with the YoY rate falling from 8.7% to 7.9% – the market consensus was for a drop to 8.2%. Core inflation eased to 6.9% but had been expected to remain at 7.1%.

For BoE deliberations into the next policy meeting on 3rd August the CPI data should help lean the BoE more toward 25 bps rather than 50 bps.

We have argued that the UK rates curve was overdone in terms of tightening required and we maintain two further 25 bps rate hikes in August and September are likely before the tightening cycle ends. If our view is correct, that implies about 50-60 bps of excessive pricing which means market rates are likely to adjust lower over the period from now through to around the September meeting. The Pound is set to underperform for a period as this adjustment unfolds.

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