- In limited trading, the British pound received a boost after the latest UK inflation reading exceeded expectations and shifted the odds in favor of an August rate cut.
- According to forex trading platforms, the GBP/USD pair rose to the 1.2482 resistance level before settling around the 1.2450 level at the time of writing the analysis.
- This is while the US dollar remains the strongest against other major currencies.
In the forex market, the pound sterling also rose against the euro to 1.1735 in the minutes following the headline news on UK CPI inflation, which rose to 3.2% year-on-year in March, down from 3.4% in February but beating market expectations of 3.1%.
According to economic calendar data, the UK's all-important core inflation rate rose by 4.2% year-on-year, from 4.5%, but beat market expectations of 4.1%. Services inflation eased slightly from 6.1% to 6.0%. This level is still too high to be consistent with an imminent rate cut from the Bank of England. Commenting on the results, Francesco Pesole, ING FX Analyst, says: "The services CPI - which the BoE is mostly looking at - slowed from 6.1% to 6.0%, versus consensus and the BoE's own forecast of 5.8%." added, "Along with stronger-than-expected wage data, it seems increasingly likely that the first BoE rate cut won't come until August."
In general, markets had favored June as the start date for the rate-cutting cycle, but some MPC members have recently indicated that they prefer an August cut. These figures could give this camp of policymakers a stronger hand in the upcoming deliberations. Commenting on this, Andrew Sentance, a former member of the Bank of England's Monetary Policy Committee, says, "A 25-basis-point rate cut in the UK is not fully priced into financial markets until later this year. Today's inflation and wage data are making investors more cautious about rate cuts."
Further complicating matters for the BoE is also the expectation that the Fed will only cut US rates once in 2024. Moreover, the BoE and other central banks prefer to move in tandem with the Fed to minimize any potential currency weakness. Clearly, a weaker GBP/USD would boost import costs, which is particularly unwelcome given the continued rise in global oil and gas prices.
For the pound sterling, what matters is how market expectations about the timing and extent of expected rate cuts evolve. The above-consensus wage data on Tuesday and the inflation surprise mean that a May cut is off the table. Furthermore, the April inflation reading will determine whether the start will be in June or August. Also, economists expect CPI to fall below the BoE's 2.0% target next month due to the large base effects of lower household energy bills in April.
This could give the bank cover to cut rates by 25 basis points in June, but all indications are that inflation will rise above 2.0% in the coming months, driven by services and core inflation. Overall, strong wages and above-consensus inflation next month could push the bank to prefer an August rate hike, which would be supportive of sterling, especially against the euro if the ECB cuts rates in June. However, analysts at DNB, the Scandinavian bank, say they estimate that the bank will not cut rates until November.
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Technical forecasts for the GBP/USD pair today:
According to the performance on the daily chart, the general trend of the price of the British pound against the US dollar GBP/USD is still bearish, and a breach of this trend will not occur without moving towards the resistance levels of 1.2620 and 1.2775, respectively. Considering that the bears’ movement in the currency pair below the psychological level of 1.2400 will move the technical indicators towards strong selling saturation levels. Today, the economic calendar is devoid of important British releases, and all focus will be on the American data, the Philadelphia Industrial Index, the number of weekly unemployed claims, and statements by a number of US Federal Reserve officials.
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