We have a new set of UK inflation figures coming soon.
How might these updates affect BoE policy bias and GBP price action?
Focus on the event:
UK Consumer Price Index (CPI) and inflation data for May 2023
When will it be released:
June 21, 2023 (Wednesday), 6:00 AM GMT
Use our forex market hours tool to convert GMT to your local time zone.
Expectations:
- Core CPI YoY: +8.4% YoY vs. +8.7% YoY
- Core CPI YoY: +5.8% YoY vs. +6.8% YoY prior
- Monthly PPI Inputs: +0.4% mom expectation vs -0.3% mom prior
- Monthly PPI Output: +0.4% m/m expected vs. 0.0% m/m prior
Related data since the last data event/release:
- average income indicator Acceleration from 6.1% to 6.5% for the three-month period ended April vs. 6.1% consensus
- S&P Global Manufacturing PMI For the month of May, it fell to a four-month low, as average input costs registered a slight decline
- S&P Global Services PMI In May, that reversed a slightly faster pace of expansion as wage pressures pushed cost inflation to a three-month high.
- in April, product input prices It slowed from 7.3% yoy to 3.9% during production prices It fell from 8.5% year-on-year to 5.4%, the lowest annual rate since July 2021.
Previous issues and the impact of environmental risks on the pound sterling
May 24, 2023
Event Results/Price Action:
UK headline CPI for April came in stronger than expected, reading down from 10.1% to 8.7% y/y vs the figure estimated at 8.2% to reflect stubborn inflationary pressures.
The core version of the report also beat market expectations, rising from 6.2% y/y to 6.8% in April instead of flat.
Meanwhile, core inflation measures came in mixed, with the retail price index also beating estimates while producer prices indicated weaker input costs.
However, the pound rose against its forex counterparts after most of them saw upbeat numbers, as chances of further BoE tightening in upcoming meetings supported.
Risk Environment and Internal Market Behaviors:
Price action was mostly consolidated during the May trading week, as investors were wary of a lack of developments in the US debt ceiling talks.
Over the weekend, talks broke down in Biden’s absence, prompting Treasury Secretary Yellen to remind that the default June 1 deadline is fast approaching. This put negative pressure on risky assets such as stocks and commodities while supporting safe-haven currencies.
Despite US stocks rallying rapidly in the tech sector on Thursday, broad risk appetite remained shaky at the end of the week when the US was on negative watch by Fitch Ratings.
However, some positive developments during the New York session on Friday led to a recovery in higher-yielding assets such as stocks, crude oil, and cryptocurrencies.
April 19, 2023
Event Results/Price Action:
UK inflation data came in stronger than expected for the month of March, with core CPI falling from 10.4% to 10.1% y/y vs. an estimated reading of 9.8%.
Core CPI for March also came in above consensus, holding at 6.2% yoy rather than falling to the expected figure of 6.0%.
In doing so, the pound was able to extend gains after the break through the middle of the week, before giving up ground to the likes of the yen, franc and dollar later.
Risk Environment and Internal Market Behaviors:
The spotlight was mostly on central banks’ monetary policy biases and how they might affect the odds of a global recession.
In particular, stronger-than-expected US data raised the prospect of the Fed further tightening the line, drawing risky assets such as bitcoin And crude oil is less.
Upbeat figures from China released in the middle of the week brought relief to higher yielders (likely to support GBP vs. safe havens), but those gains were short lived as concerns about flat inflation and downbeat manufacturing sector data revived recession fears.
Price action odds:
Possibilities of feeling risky:
With a relatively slow start to the week due to the lack of top notch catalysts, volatility could be low and broad risk sentiment could be a continuation of the previous Friday’s sentiment… barring any major surprise catalysts.
Note that US banks are closed on Monday, and that also likely translates to low volatility conditions and no changes in general sentiment ahead of the event.
After the event, Fed Chair Powell will present the Semi-Annual Monetary Policy Report before the House Financial Services Committee, in Washington, D.C., which could affect broad risk sentiment and USD sentiment, which could influence GBP behavior until we get the BoE report. Thursday’s monetary policy statement.
Scenarios for the British pound:
Possible base scenario:
Inflation data out of the UK has been hot for the past three months, so there is a good chance we will see another bullish surprise to the May report.
Data on underlying price pressures, such as the index of average earnings and cost components in PMI surveys, suggest that CPI may rebound again.
A big surprise to the upside could keep the Bank of England’s hands tied, leaving policymakers with barely any other choice but to raise borrowing costs again at their next meeting. After all, Governor Bailey has repeatedly expressed concerns about “steady inflation” and the potential for a wage-price spiral.
In that case, stay tuned for a short term rally in Sterling against relatively dovish central bank currencies (JPY and NZD) or an extension of gains against the safe haven dollar if risk appetite is in play.
Possible alternative scenario:
Weaker than expected UK inflation data may be enough to convince GBP traders that it is time for the BoE to consider stopping the tightening cycle.
Don’t forget that recession risks and household spending problems are still on the BoE’s list of concerns, so cautious central bank officials might welcome the opportunity to sit on their hands and wait for more data.
In this scenario, there could be opportunities to sell the GBP against its hawkish central bank counterparts (US Dollar, Australian Dollar, Canadian Dollar and Euro).
