UK CPI inflation slows sharply to 7.9% in June, disappoints BoE hawks
- United Kingdom CPI rose 7.9% YoY in June vs. 8.2% expected.
- Monthly British CPI inflation drops to 0.1% in June vs. 0.4% expected.
- The GBP/USD pair drops below 1.3000 on soft UK CPIs.
The United Kingdom's annual Consumer Price Index (CPI) advanced 7.9% in June, slowing sharply from an 8.7% increase recorded in May, the latest data published by the UK Office for National Statistics (ONS) showed on Wednesday. The market had estimated an 8.2% growth.
The Core CPI gauge (excluding volatile food and energy items) increased 6.9% YoY last month, compared with a 7.1% rise seen in May while beating expectations of a 7.1% print.
Meanwhile, the UK Consumer Price Index rose 0.1% MoM in June vs. the 0.4% estimates and the 0.7% previous reading.
The UK Retail Price Index for June climbed 0.3% MoM and 10.7% YoY, missing expectations across the time horizon.
FX implications
In a knee-jerk reaction to the UK CPI data, the GBP/USD pair tumbled nearly 60 pips to trade near 1.2960, down up 0.46% on the day.
GBP/USD: 15-minutes chart
Why does UK inflation matter to traders?
The Bank of England (BOE) 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 in 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.
BoE FAQs
What does the Bank of England do and how does it impact the Pound?
The Bank of England (BoE) decides monetary policy for the United Kingdom. Its primary goal is to achieve ‘price stability’, or a steady inflation rate of 2%. Its tool for achieving this is via the adjustment of base lending rates. The BoE sets the rate at which it lends to commercial banks and banks lend to each other, determining the level of interest rates in the economy overall. This also impacts the value of the Pound Sterling (GBP).
How does the Bank of England’s monetary policy influence Sterling?
When inflation is above the Bank of England’s target it responds by raising interest rates, making it more expensive for people and businesses to access credit. This is positive for the Pound Sterling because higher interest rates make the UK a more attractive place for global investors to park their money. When inflation falls below target, it is a sign economic growth is slowing, and the BoE will consider lowering interest rates to cheapen credit in the hope businesses will borrow to invest in growth-generating projects – a negative for the Pound Sterling.
What is Quantitative Easing (QE) and how does it affect the Pound?
In extreme situations, the Bank of England can enact a policy called Quantitative Easing (QE). QE is the process by which the BoE substantially increases the flow of credit in a stuck financial system. QE is a last resort policy when lowering interest rates will not achieve the necessary result. The process of QE involves the BoE printing money to buy assets – usually government or AAA-rated corporate bonds – from banks and other financial institutions. QE usually results in a weaker Pound Sterling.
What is Quantitative tightening (QT) and how does it affect the Pound Sterling?
Quantitative tightening (QT) is the reverse of QE, enacted when the economy is strengthening and inflation starts rising. Whilst in QE the Bank of England (BoE) purchases government and corporate bonds from financial institutions to encourage them to lend; in QT, the BoE stops buying more bonds, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive for the Pound Sterling.
This section below was published at 02:15 GMT as a preview of the UK inflation data.
- The Office for National Statistics is due to publish the UK inflation data on Wednesday.
- Core annual inflation is seen sticky at 7.1%, headline figure set to fall further.
- The UK CPI data could cement a 50 bps BoE August rate hike and fuel a Pound Sterling rally.
The all-important Consumer Price Index (CPI) data from the United Kingdom (UK) will be published on Wednesday, July 19. Amid mounting wage and inflationary pressures in the UK, the country’s CPI release is likely to significantly impact the Bank of England (BoE) rate hike outlook, in turn, influencing the near-term direction in the GBP/USD pair.
After presenting the central bank’s half-yearly Financial Stability Report last Wednesday, BoE Governor Andrew Bailey said that "the UK economy and financial system has so far been resilient to interest rate risk." Bailey repeated his view that the current rate of pay growth was not consistent with the BoE's 2% inflation target. His comments came after the UK labor market report showed that the Unemployment Rate ticked higher to 4.0% in three months to May while the wage growth hit a record high of 7.3% 3M YoY to May.
Hot wage inflation data strengthened the case for aggressive tightening by the BoE in the upcoming months, with the peak rate seen near 6.25%. That said, all eyes now remain on the June UK inflation report, which could cement expectations of a 50 basis points (bps) rate increase by the Bank of England next month.
What to expect in the next UK inflation report?
Economists are expecting the headline annual UK Consumer Price Index inflation to fall to 8.2% in June, compared with the 8.7% print reported in May. The Core CPI is expected to rise 7.1% YoY in June, at the same pace seen in May. On a monthly basis, Britain’s CPI inflation is likely to increase 0.4% in June, slowing from a 0.7% growth booked in May.
Analysts at BBH noted, “UK data highlight will be June CPI Wednesday. Headline is expected at 8.2% y/y vs. 8.7% in May, core is expected to remain steady at 7.1% y/y, and CPIH is expected at 7.5% y/y vs. 7.9% in May. If so, the headline would be the lowest since March 2022 but still well above the 2% target.”
“WIRP suggests another 50 bp hike is largely priced August 3, followed by 25 bp hikes September 21, November 2, and December 14 that would see the bank rate peak near 6.25%,” the analysts added.
When will the UK Consumer Price Index report be released and how could it affect GBP/USD?
The UK CPI data will be released at 06:00 GMT this Wednesday. Heading into the highly-anticipated inflation release from the United Kingdom, the Pound Sterling (GBP) is struggling below the 1.3100 round level against the US Dollar, holding its corrective mode after setting 15-month highs at 1.3146 last Friday. Increased bets for aggressive BoE tightening as against the dovish Fed interest rates outlook are likely to keep the correction limited in the GBP/USD pair.
The hotter-than-expected headline and core inflation data are likely to trigger a fresh upswing in the Pound Sterling, lifting the odds for a 50 bps rate hike by the BoE in August. GBP/USD could resume its uptrend toward 1.3200. Alternatively, should the core inflation data miss market expectations, GBP/USD will likely extend its correction toward the 1.2850 key support.
Meanwhile, Dhwani Mehta, Asian Session Lead Analyst at FXStreet, offers a brief technical outlook for the major and explains: “The 14-day Relative Strength Index (RSI) has moved out of the overbought territory, suggesting that a fresh uptrend in the GBP/USD pair could be in the offing. Therefore, the UK inflation data holds the key for the near-term direction in the currency pair.
Dhwani also outlines important technical levels to trade the GBP/USD pair: “The major needs acceptance above the 1.3100 level to resume the previous uptrend. The next relevant hurdle for Pound Sterling buyers is seen at the multi-month high of 1.3146. On the downside, immediate support awaits at the 1.3000 round level, below which sellers could target the July 13 low at 1.2984. The additional correction will expose the 1.2950 psychological level.”
Author
FXStreet Team
FXStreet
