We’ve got a fresh batch of U.K. inflation figures comin’ right up soon.
How could these updates potentially impact the BOE’s policy bias and GBP price action?
Event in Focus:
U.K. 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:
- Headline CPI y/y: +8.4% y/y forecast vs. +8.7% y/y previous
- Core CPI y/y: +5.8% y/y forecast vs. +6.8% y/y previous
- PPI input m/m: +0.4% m/m forecast vs. -0.3% m/m previous
- PPI output m/m: +0.4% m/m forecast vs. 0.0% m/m previous
Relevant Data Since Last Event/Data Release:
- Average earnings index accelerated from 6.1% to 6.5% for three-month period ending in April vs. 6.1% consensus
- S&P Global manufacturing PMI for May fell to four-month low, as average input costs posted mild declines
- S&P Global services PMI for May reflected a slightly faster pace of expansion, as wage pressures pushed cost inflation to its three-month high
- In April, producer input prices slowed from 7.3% y/y to 3.9% while output prices fell from 8.5% y/y to 5.4%, the lowest annual rate since July 2021
Previous Releases and Risk Environment Influence on GBP
May 24, 2023
Event results / Price Action:
The April U.K. headline CPI came in stronger than expected, as the reading fell from 10.1% to 8.7% year-over-year versus the estimated 8.2% figure to reflect stubborn inflationary pressures.
The core version of the report also surpassed market expectations by rising from 6.2% year-over-year to 6.8% in April instead of holding steady.
Meanwhile, underlying measures of inflation came in mixed, as the retail price index also beat estimates while producer prices pointed to weaker input costs.
Even so, the pound spiked higher against its forex peers upon seeing mostly upbeat numbers, as these supported the chances of more BOE tightening in the next meetings.
Risk environment and intermarket behaviors:
Price action was characterized by consolidation for the most part during this May trading week, as investors were wary of the lack of developments in U.S. debt ceiling talks.
Over the weekend, talks broke down in Biden’s absence, prompting Treasury Secretary Yellen to remind that the June 1 default deadline is fast-approaching. This put downside pressure on risk assets like equities and commodities while propping up safe-havens currencies.
Despite a quick pop higher for U.S. equities on the tech sector rally on Thursday, broad risk appetite remained shaky towards the end of the week when the U.S. was put on “negative watch” by Fitch.
Still, some positive developments during the New York session on Friday led to a rebound for higher-yielding assets like stocks, crude oil and crypto.
April 19, 2023
Event results / Price Action:
U.K. inflation data came in stronger-than-expected for the month of March, as the headline CPI fell from 10.4% to 10.1% year-over-year versus the estimated 9.8% reading.
The March core CPI also came in above consensus, as it held steady at 6.2% year-over-year instead of dipping to the projected 6.0% figure.
With that, the pound was able to extend its post-jobs data gains throughout the middle of the week, before giving up ground to the likes of the yen, franc, and dollar later on.
Risk environment and intermarket behaviors:
The spotlight was mostly on central banks’ monetary policy biases and how these could affect the odds of a global recession.
In particular, stronger than expected U.S. data lifted the possibility of more Fed tightening down the line, dragging risk assets like bitcoin and crude oil lower.
Upbeat figures from China released midweek led to a relief rally for higher-yielders (likely supporting Sterling against safe havens), but these gains were short-lived as concerns over sticky inflation and downbeat manufacturing sector data revived recession jitters.
Price action probabilities:
Risk sentiment probabilities:
With a relatively slow start to the week on the lack of top-tier catalysts, volatility may be low and broad risk sentiment may be a continuation of the previous Friday’s vibes…barring any major surprise catalysts.
Note that U.S. banks are closed on Monday, also likely translating to low volatility conditions and no changes to broad sentiment prior to the event.
After the event, Fed Chair Powell will give the Semi-Annual Monetary Policy Report before the House Financial Services Committee, in Washington DC, which may influence broad risk sentiment and U.S. dollar sentiment, which could influence Sterling behavior until we get the Bank of England’s monetary policy statement on Thursday.
British pound scenarios:
Potential Base Scenario:
Inflation data from the U.K. has been coming in hot for the last three months, so there’s a good chance we might see yet another upside surprise for the May report.
Data on underlying price pressures, such as the average earnings index and cost components of PMI surveys, are also pointing to the possibility of another CPI pickup.
A significant upside surprise would keep the BOE‘s hands tied, leaving policymakers with barely any other choice but to increase borrowing costs again in their next meeting. After all, Governor Bailey has repeatedly been expressing concerns about “sticky inflation” and the possibility of a wage price spiral.
In this case, stay on the lookout for a short-term GBP rally against currencies with relatively dovish central banks (JPY, NZD) or an extension of gains against the safe-haven dollar if risk appetite is in play.
Potential Alternative Scenario:
Weaker than expected U.K. inflation data could be enough to convince pound traders that it’s high time for the BOE to consider pausing its tightening cycle.
Don’t forget that recession risks and household spending woes are still on the laundry list of concerns for the BOE, so cautious central bank officials might welcome the chance to sit on their hands and wait for more data.
In this scenario, there might be opportunities to sell GBP versus forex counterparts with hawkish central banks (USD, AUD, CAD, EUR).
