The UK CPI report today will be one of the more closely watched ones

This is one of them, if not debatable the The report is key to settling this debate. Because the next UK CPI report for May will come just one day before the June monetary policy decision. So, what does the backend look like as we head towards the major release later on?

Let's start with the data itself.

The release forecasts show that the headline annual inflation rate is expected to reach 2.1% in April. This would be the lowest reading since July 2021. The March reading was 3.2%, which is a sharp decline. However, it needs to be put into context.

The sharp decline in the year-on-year comparison was largely due to Ofgem's lower energy price cap. Ofgem has reduced the maximum price on UK energy bills by 12% as announced herestarting April 1.

Besides, the core annual inflation rate is expected to fall to 3.6% in April, down from 4.2% in March. Meanwhile, services inflation is expected to remain steady at around 5.5% but still below the previous month's 6.0% reading.

What does all this mean?

The debate now revolves around the Bank of England over whether it will be able to cut interest rates sooner rather than later. The odds of a rate cut in June are close to 50-50, with the probability now as high as 48%. The next meeting in August will see almost 95% odds of a BoE cut, so it is almost fully priced in.

As such, weaker-than-expected readings in the CPI report will see traders push price into the June action for sure. This, in turn, will cause the pound to fall in response. GBP/USD is now at 1.2710, not far from trending towards its 100 hour moving average at 1.2693. A break below would see buyers relinquish control in the near term, making way for a steeper decline towards 1.2600.

Of course, the flip side is that the readings reflect firmer inflation than expected. This will cause traders to phase out the potential June move. With the pound already at its highest levels since March, this paves the way for a push to 1.2800 with the possibility of seeing a March high of 1.2893 depending on the dollar side of the equation.