- The UK Office for National Statistics will publish the CPI report on Wednesday.
- United Kingdom’s headline and core annual inflation are likely to fall sharply in April.
- The UK CPI data could affirm BoE June interest rate cut expectations, triggering a big move for the Pound Sterling.
The United Kingdom’s (UK) Office for National Statistics (ONS) will release the high-impact Consumer Price Index (CPI) data on Wednesday at 06:00 GMT.
The UK CPI inflation report could show a fresh significant decline in inflation, ramping up expectations of an interest-rate cut by the Bank of England (BoE) in June and fuelling intense volatility around the Pound Sterling.
What to expect from the next UK inflation report?
The headline annual UK Consumer Price Index is expected to increase by 2.1% in April, a significant cooling off from a 3.2% rise in March. The reading would be the lowest since July 2021, almost at the BoE’s 2.0% target.
Core CPI inflation is seen declining to 3.6% YoY in April from 4.2% in March, also set to see a sharp slowdown. Meanwhile, the British monthly CPI is likely to rise 0.2% in the same period, as against the previous acceleration of 0.6%.
The primary reason behind the sharp deceleration in UK inflation could be a notable decline in the Ofgem energy price cap. Economists also expect services inflation – one of the stickiest components of price growth and a concern for many policymakers – to fall to 5.4% YoY even in April, down from a 6.0% figure recorded in March.
A bigger-than-expected drop in headline annual inflation and services inflation could cement a BoE June rate cut. Money markets are currently pricing in a 60% probability that the UK central bank will lower borrowing costs next month.
Following its May policy meeting, the BoE maintained interest rates at a 16-year high of 5.25%, in a split decision with two members dissenting in favor of a rate reduction by 25 basis points (bps) to 5%.
However, BoE Governor Andrew Bailey, during his post-policy meeting press conference, said that “we are not yet at a point where we can cut the base rate.” Commenting on the possibility of a June rate cut, he noted that there are two more inflation prints before that meeting.
Previewing the UK inflation data, analysts at TD Securities (TDS) noted: “Headline inflation should fall to just a touch above the 2% target in April, largely on the back of another 13% decline in Ofgem’s energy price cap. Base effects in core goods should help core to fall to 3.6% y/y (mkt: 3.6%).”
“On services, we see sticky momentum, partly in hotels and airfares, keeping the y/y rate 0.1 ppts above the BoE’s forecast,” the TDS analysts said.
When will the UK Consumer Price Index report be released and how could it affect GBP/USD?
The CPI data will highlight the UK calendar on Wednesday at 06:00 GMT. The Pound Sterling is battling the 1.2700 round level against the US Dollar in the lead-up to the inflation release. Meanwhile, the US Dollar Index is holding its recovery momentum on waning expectations of aggressive interest rate cuts by the US Federal Reserve (Fed).
A hotter-than-expected headline and core inflation data could pour cold water on market expectations of a June BoE rate cut, providing a fresh lift to the Pound Sterling. In such a case, GBP/USD could unleash additional recovery toward the 1.2800 level. On the other hand, GBP/USD could retest the 1.2600 demand area if significantly softer UK CPI readings affirm BoE rate cut bets for next month.
Dhwani Mehta, Asian Session Lead Analyst at FXStreet, offers a brief technical outlook for the major and explains: “GBP/USD’s daily chart portrays a bullish crossover of the 21-day Simple Moving Average (SMA) and the 200-day SMA, suggesting a constructive outlook for the pair in the near term. The 14-day Relative Strength Index (RSI) points north above the midline, near 67.0, justifying the bullish potential in the Pound Sterling.”
Dhwani adds: “The pair need to take out the March 21 high of 1.2804 to sustain the recovery momentum. The upside targets are seen at the 1.2850 psychological level and the March 8 high of 1.2894. On the other hand, the immediate support is placed at 1.2633, the 100-day SMA, below which the 1.2585-1.2565 demand area could be tested. The last line of defense for buyers is seen at the 200-day SMA at 1.2540.” Dhwani adds.
British Pound PRICE This month
The table below shows the percentage change of British Pound (GBP) against listed major currencies this month. British Pound was the strongest against the US Dollar.
| USD | EUR | GBP | JPY | CAD | AUD | NZD | CHF | |
|---|---|---|---|---|---|---|---|---|
| USD | -1.90% | -1.77% | -1.03% | -1.10% | -2.98% | -3.56% | -1.13% | |
| EUR | 1.90% | 0.14% | 0.88% | 0.84% | -1.09% | -1.67% | 0.79% | |
| GBP | 1.77% | -0.14% | 0.73% | 0.69% | -1.23% | -1.80% | 0.65% | |
| JPY | 1.03% | -0.88% | -0.73% | -0.04% | -1.96% | -2.58% | -0.08% | |
| CAD | 1.10% | -0.84% | -0.69% | 0.04% | -1.92% | -2.50% | -0.05% | |
| AUD | 2.98% | 1.09% | 1.23% | 1.96% | 1.92% | -0.60% | 1.89% | |
| NZD | 3.56% | 1.67% | 1.80% | 2.58% | 2.50% | 0.60% | 2.52% | |
| CHF | 1.13% | -0.79% | -0.65% | 0.08% | 0.05% | -1.89% | -2.52% |
The heat map shows percentage changes of major currencies against each other. The base currency is picked from the left column, while the quote currency is picked from the top row. For example, if you pick the British Pound from the left column and move along the horizontal line to the US Dollar, the percentage change displayed in the box will represent GBP (base)/USD (quote).
UK gilt yields FAQs
UK Gilt Yields measure the annual return an investor can expect from holding UK government bonds, or Gilts. Like other bonds, Gilts pay interest to holders at regular intervals, the ‘coupon’, followed by the full value of the bond at maturity. The coupon is fixed but the Yield varies as it takes into account changes in the bond’s price. For example, a Gilt worth 100 Pounds Sterling might have a coupon of 5.0%. If the Gilt’s price were to fall to 98 Pounds, the coupon would still be 5.0%, but the Gilt Yield would rise to 5.102% to reflect the decline in price.
Many factors influence Gilt yields, but the main ones are interest rates, the strength of the British economy, the liquidity of the bond market and the value of the Pound Sterling. Rising inflation will generally weaken Gilt prices and lead to higher Gilt yields because Gilts are long-term investments susceptible to inflation, which erodes their value. Higher interest rates impact existing Gilt yields because newly-issued Gilts will carry a higher, more attractive coupon. Liquidity can be a risk when there is a lack of buyers or sellers due to panic or preference for riskier assets.
Probably the most important factor influencing the level of Gilt yields is interest rates. These are set by the Bank of England (BoE) to ensure price stability. Higher interest rates will raise yields and lower the price of Gilts because new Gilts issued will bear a higher, more attractive coupon, reducing demand for older Gilts, which will see a corresponding decline in price.
Inflation is a key factor affecting Gilt yields as it impacts the value of the principal received by the holder at the end of the term, as well as the relative value of the repayments. Higher inflation deteriorates the value of Gilts over time, reflected in a higher yield (lower price). The opposite is true of lower inflation. In rare cases of deflation, a Gilt may rise in price – represented by a negative yield.
Foreign holders of Gilts are exposed to exchange-rate risk since Gilts are denominated in Pound Sterling. If the currency strengthens investors will realize a higher return and vice versa if it weakens. In addition, Gilt yields are highly correlated to the Pound Sterling. This is because yields are a reflection of interest rates and interest rate expectations, a key driver of Pound Sterling. Higher interest rates, raise the coupon on newly-issued Gilts, attracting more global investors. Since they are priced in Pounds, this increases demand for Pound Sterling.
