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UK inflation fell to the BoE's target of 2.0% for the first time since 2021.

UK inflation fell to the BoE's target of 2.0% for the first time since 2021.
UK inflation fell to the BoE's target of 2.0% for the first time since 2021.

 


UK annual CPI rose 2.0% in May, up from estimates of 2.0%. UK inflation in May was stable at 0.3% month-on-month, in line with forecasts. GBP/USD remains above 1.2700 after UK CPI inflation data.

According to data released by the Office for National Statistics (ONS) on Wednesday, the UK Consumer Price Index (CPI) rose at an annual rate of 2.0% in May, following a 2.3% increase in April.

The figure was in line with market expectations for 2.0% growth and returned to the Bank of England target for the first time since 2021.

Core CPI (excluding highly volatile food and energy items) rose 3.5% in May compared to the same period last year, in line with expectations compared to a 3.9% rise in April.

UK services CPI rose 5.7% year-on-year in May, slightly slower than the 5.9% rise in April.

Meanwhile, the UK consumer price index in May rose 0.3% compared to the previous month, showing the same increase as in April, but falling below the expected 0.4%.

GBP/USD Reaction to UK CPI Inflation Data

UK CPI data failed to move the needle around the pound as the GBP/USD pair remained in a range above 1.2700. On this day, the pair is trading 0.04% higher.

GBP/USD: 15-minute chart

British pound price today

The table below shows the rate of change for the British Pound (GBP) against the major currencies it is currently listed on. The British pound was the strongest against the New Zealand dollar.

USD EUR GBP JPY CAD AUD NZD CHF USD 0.00% -0.05% -0.03% -0.02% -0.21% 0.08% -0.06% EUR -0.01% -0.06% -0.02% -0.03% -0.22% 0.10% -0.06% GBP 0.05% 0.06% 0.02% 0.03% -0.16% 0.14% 0.01% Yen 0.03% 0.02% -0.02% 0.00% -0.17% 0.13% -0.00% CAD 0.02% 0.03% -0.03% -0.01% -0.18% 0.13% – 0.02% AUD 0.21% 0.22% 0.16% 0.17% 0.18% 0.19% NZD -0.08% -0.10% -0.13% -0.13% -0.32% -0.14% CHF 0.06% 0.06% 0.01%. 02 % -0.19% 0.14%

Heatmap shows the percentage change between major currencies. The base currency is selected from the left column and the quote currency is selected from the top row. For example, if you select British Pounds in the left column and move along the horizontal line to US Dollars, the percentage change displayed in the box represents GBP (base)/USD (quote).

This section below is a preview of UK Consumer Price Index (CPI) data published at 02:15 GMT.

The Office for National Statistics is due to release its CPI report for May on Wednesday. UK inflation is expected to subside and return to the BoE's target level. The Bank of England is expected to announce its decision on monetary policy on Thursday. The pound is expected to react strongly to the inflation data.

The Office for National Statistics (ONS) is due to release its Consumer Price Index (CPI) report for May at 6am (GMT) on Wednesday. At the same time, ONS plans to release producer price index (PPI) figures for the same period.

Inflation in the UK is still above the Bank of England's (BoE) target of 2%. The latest data shows UK CPI rose 2.3% year-on-year, with core annual inflation in April hitting 3.9%. Market participants expect CPI to rise 2% year-on-year in May, meeting the BoE's target for the first time in about three years.

What can we expect from the May UK inflation report?

Financial markets expect UK headline CPI to rise 2% year-on-year, with the key annual figure expected to rise 3.5%. This figure is an improvement on April's figures, when CPI rose 2.3% and the core index excluding volatile food and energy prices rose 3.9%.

However, monthly inflation in May rose 0.4%, up from 0.3% the previous month. This may not actually be a worrisome result, but even with prices this low, rising price pressures can cause markets to contract.

The BoE's Monetary Policy Committee (MPC) left interest rates unchanged at a multi-year high of 5.25% at its May meeting, but two of its nine voting members favored cutting rates by 25 basis points.

“We have not yet reached a point where we can cut interest rates,” BoE Governor Andrew Baild said. But policymakers acknowledged a steady decline in inflation. The central bank's economic outlook released alongside its May meeting shows that consumer inflation is expected to remain close to its 2% target in the near term, but could rise slightly by the end of the year as energy-related base effects dissipate. Policymakers also said services sector inflation remained at 6.0% as of March, more than double the BoE's target.

Will a 2% print be enough to trigger a rate cut this week? It may seem difficult, but it's not impossible. While market participants may pay attention to the headline numbers, policymakers will likely focus more on services inflation. The recent sharp decline, along with the headline numbers meeting expectations, will certainly increase the chances of a rate cut in June. However, before the inflation data is released, market participants believe the BoE will keep interest rates on hold once more.

When will the UK Consumer Price Index report be released and what impact could it have on GBP/USD?

The UK releases CPI and PPI data at 6:00 GMT on Wednesday. Pound Sterling (GBP) is trading below the 1.2700 level against the United States Dollar (USD), with the latter maintaining a firmer tone after the United States (US) reported in May that price pressures were continuing to ease. The U.S. Federal Reserve (Fed) kept interest rates unchanged and announced it may cut rates one or two times before the end of the year.

The Federal Reserve did not cut rates ahead of the major currencies because the Bank of Canada (BoC) and the European Central Bank (ECB) have already cut rates. This means the BoE can proceed with more confidence once inflation falls into policymakers' comfort zone.

With this in mind, the figures released on Wednesday may trigger some price movement around the GBP crossover. Typically, a higher-than-expected reading signals that the BoE is stable, which should support the pound.

If inflation-related numbers fall below market expectations, speculative interest will flock to a rate cut as early as this week, putting pressure on GBP. Keep in mind that market participants may remain on the sidelines ahead of the BoE's announcement in the next 24 hours.

Valeria Bednarik, Senior Analyst at FXStreet, said: “The GBP/USD pair has been hovering around 1.2700 for five weeks in a row, showing little signs of directional progress. It reached a high at 1.2859 on June 12 and a low was set at the 1.2660 price range. Ahead of the announcement, GBP/USD strengthened and moved closer to the lower end of the previously mentioned range. Technically speaking, the argument for a bearish extension has become more solid on the daily chart, with the pair currently developing below the flat 20 simple moving average (SMA) and approaching the undirected 100 SMA, providing dynamic support around 1.2640. . In the meantime, technical indicators remain at negative levels, but their intensity is uneven and not enough to anticipate a directional move.”

Bednarik added: “If GBP/USD falls below the 1.2640/50 area, the pair could quickly reach the 1.2600 point on its way to 1.2520. The top looks messier. Sellers rejected the rise around 1.2800 and the high at 1.2859 is also relevant. A breakout beyond the latter could lead to a sharp rise, but that is unlikely until after the BoE's monetary policy announcement.

Inflation FAQ

Inflation measures the rise in prices of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes volatile factors such as food and fuel, which can fluctuate due to geopolitical and seasonal factors. Core inflation is the number that economists focus on and the level that central banks target. Central banks are mandated to keep inflation at a manageable level, usually around 2%.

The Consumer Price Index (CPI) measures changes in prices for a basket of goods and services over a period of time. It is typically expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the number central banks target because it excludes volatile food and fuel inputs. A rise in core CPI of more than 2% will generally result in higher interest rates, and the opposite will apply if it falls below 2%. Higher interest rates are positive for a currency, so higher inflation generally makes the currency stronger. The opposite is true when inflation falls.

It may seem counterintuitive, but high inflation in a country increases the value of its currency and vice versa, which leads to lower inflation. This is because central banks typically raise interest rates to combat high inflation. This leads to more global capital inflows from investors looking for profitable places to park their money.

Previously, gold was an asset that investors relied on because it preserved its value in times of high inflation, and while investors will often purchase gold as a safe haven asset in times of extreme market turmoil, this is not the case in most cases. . This is because when inflation is high, the central bank raises interest rates to prevent it. Higher interest rates are negative for gold because they increase the opportunity cost of holding gold compared to interest-bearing assets or keeping money in a cash savings account. On the other hand, lower inflation tends to be positive for gold because it lowers interest rates, making the bright metal a more viable investment alternative.

Sources

1/ https://Google.com/

2/ https://www.fxstreet.com/news/uk-cpi-set-to-cool-down-further-in-may-reaching-boes-2-target-202406190215

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