Market update: UK's April CPI data crucial for potential June interest rate cut

On Wednesday, the UK's Consumer Price Index (CPI) data is expected to decline for both headline and core measures. Consensus estimates project the headline measure dropping significantly from 3.2% to 2.1%. This lofty expectation could lead to market disappointment if the figures come in higher than anticipated. Even a small miss to the upside would still represent substantial progress.

Economic calendar

In April of last year, services inflation re-accelerated more than expected, continuing into May and June, prompting the Bank of England to raise interest rates during its June 2023 meeting. However, this year’s guidance suggests that the data may be less extreme due to generally lower headline prices. Services prices, often index-linked to headline prices, are not expected to pass through as significantly as in 2023.

UK Services CPI Year-on-Year Change (April -July)

A UK inflation print that meets or undershoots expectations could catalyse bearish sentiment for sterling, particularly given the waning GBP/USD price action below the 1.2736 level. Given the high inflation expectations, even a slight upside miss might still exert bearish pressure, reflecting the overall progress towards the 2% inflation target.

The presence of upper wicks and small candle bodies in GBP/USD charts suggests diminishing bullish momentum, potentially leading to a lower move if catalysed by appropriate data. Should prices cap at 1.2736, a downward movement would remain constructive following a better-than-expected CPI print. The pound has rallied against the dollar since April's lower US CPI print. A short bias would be invalidated at 1.2800, with support and a short target set at 1.2585.

GBP/USD daily chart

Markets currently view a June cut as a 50/50 outcome ahead of UK CPI – enhancing its importance in the lead up to the central bank meeting. A softer CPI print, followed by dovish comments from BoE officials creates an environment where the first rate cut since the hiking cycle may be upon us sooner than expected. However, if inflation fails to match up to the lofty expectations, pricing may reflect a preference for August or even later in the year.

Implied rate cuts into year end (in basis points)

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