UK April inflation preview – will CPI slowdown be enough for a rate cut?
Will a slowdown in UK inflation this week pave the way for a UK rate cut in June?
UK inflation for April is predicted to drop to 2.1%, according to forecasters polled by Reuters. This would mark the first time since March 2022 that the UK's inflation rate is lower than both the US (3.4%) and the Eurozone (2.4%).
Falling energy prices drive lower inflation
The sharp drop in UK inflation is largely attributed to a 12% fall in the regulatory cap on household energy bills last month, following a decline in wholesale gas prices. April would be the second consecutive month where UK inflation remains lower than US consumer price inflation (CPI).
Rate cut debate intensifies
The lower inflation figures are expected to fuel debates among policymakers at the Bank of England (BoE) on the timing of interest rate cuts from the current 16-year high of 5.25%. While some officials are pushing for a reduction as soon as the June meeting, financial markets are pricing in the first cut to occur in August.
Inflation and rates outlook
Economists anticipate the European Central Bank (ECB) to implement an initial rate cut in June, while the US is expected to hold interest rates unchanged for longer, mainly due to the better performance of the economy which has, in turn, driven higher inflation.
While the temporary dip in inflation is welcomed, the BoE remains focused on keeping inflation sustainably at its 2% target, rather than just fleetingly touching it. Andrew Bailey, the BoE's governor, stated after the May meeting that a key question is whether higher wages are being passed through to consumers, with the latest data suggesting this is not yet happening.
GBP/USD outlook – technical analysis
The pound has already rallied sharply against the US dollar, surging from the lows of April at $1.23 back to the $1.27 area, last seen a month ago.
This has seen the price move above the 200-day, 50-day and now the 100-day simple moving averages (SMA), while also breaking above trendline resistance from the March highs. A lower CPI report might take some of the strength out of this move, and cause at least some consolidation towards $1.26.
It would need a close back below $1.2550 to put a more substantial dent in the current short-term bullish price outlook. Further gains from current levels target $1.28 and then $1.29.
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