UK Inflation, GBP/USD Analysis

• UK CPI surprise unwinds rate cut bets
• GBP strengthened after hotter CPI, GBP/USD trades higher
• EUR/GBP extends declines after breaking support, one to watch ahead of June ECB meeting
• The analysis in this article makes use of chart patterns and key support and resistance levels. For more information visit our comprehensive education library

Inflation Proves Too Hot to Handle in April, Unravelling Rate Cut Bets

The April print was identified as a potential hurdle for the Bank of England (BoE) after last year’s print marked the start of a reacceleration in inflation pressures that forced another rate hike from the BoE.

It was hoped that lower headline inflation leading up to the April 2024 print would have a cooling effect on services inflation. That proved not to be the case. Monthly and yearly inflation measures for the services sector surpassed not just the average estimate but also the maximum estimate within the projection data.

Headline CPI printed above expectations but has made significant headway within the overall disinflationary process. Core CPI (YoY) also moved lower but not by as much as the headline measure, from 4.2% to 3.9% (est. 3.6%)

Source: Refinitiv

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The incoming data has some meaningful ramifications for rate cut bets and the pound. Yesterday afternoon, the market expected a little over 50% chance that June would be appropriate for the first rate cut by the BoE. Now, that has dwindled to a lowly 14% and has shifted expectations of a rate cut from August to November. Additionally, expectations of two rate cuts this year have retreated to just one with the potential for a second.

Rate Cut Expectations (in Basis Points, ‘Bps’)

Source: Refinitiv

GBP/USD Strengthened after Hot CPI Print

GBP/ USD naturally witnessed a move higher on the release of the hot CPI data, trading above the 1.2736 prior swing high (November 2023) but pulling back beneath it as the dust settles.

GBP/USD 5-Minute Chart