Sterling rallies after mixed UK CPI data
While UK inflation slowed markedly in April, providing some cheer for consumers, signs of strength in services pricing has spoiled the party for dovish Monetary Policy Committee members.
UK inflation drops sharply
April’s UK consumer price inflation (CPI) data came in at 2.3% year-on-year (YoY) and 0.3% month-on-month (MoM). This is a sharp drop from the March readings of 3.2% and 0.6% respectively, though it was higher than the expected figures of 2.1% and 0.2%.
The April data revealed a slower-than-expected decline in price increases. This upward surprise in inflation figures has emerged as a potential obstacle to the recent optimism around a potential June rate cut by the Bank of England (BoE), which was previously seen as a 50/50 prospect. April data proved problematic last year as well, prompting a period of higher inflation that led the BoE to increase its rate hike increments from 25 basis points (bp) to 50 bp at the June 2023 meeting.
June rate cut off the cards?
Now, market pricing indicates only a 14% chance of a rate cut in June, with expectations shifting to November for the first reduction rather than August. Apart from the higher-than-anticipated headline and core inflation prints, the UK services inflation figures were the most shocking aspect of the data, surpassing even the highest forecasts for both the yearly and monthly comparisons.
A fly in the oinment
The UK inflation rate of 2.3% is now below the G20 average, a position expected to continue through the summer. Although surpassing the 2% target will temporarily delay some political pressures for interest rate cuts, the more concerning data point is the 5.9% YoY increase in services inflation.
Sterling rallies versus dollar and euro
The news sent the pound up sharply against the US dollar, toits highest level since the middle of March.
This move through $1.27 arguably clears the way for a move to the highs of early March towards $1.29, and negates any expectation of a pullback for now unless we see a close back below $1.2650.
Meanwhile, EUR/GBP continued its slump, falling through the April lows. It is now on course for the £0.85 lows seen in February and March, barring a recovery above £0.8550.
FTSE 100 finally knocked off its perch
The news this morning prompted a sharp drop for the FTSE 100, though some buyers have since emerged.
A full-blown pullback has yet to develop, with the current price action resembling more of a consolidation than anything more dramatic. That might come with a close below 8300, which might then see the price close some of the gap with the 50-day simple moving average (SMA), currently down at 8064, or 4% away.
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