• The CPI report will be released by the UK Office for National Statistics on Wednesday.
• April is predicted to see a significant decline in core and headline annual inflation in the United Kingdom.
• The UK CPI statistics may support forecasts for a June interest rate drop by the Bank of England, which would cause the pound sterling to move significantly.

On Wednesday at 06:00 GMT, the Office for National Statistics (ONS) of the United Kingdom (UK) will issue the high-impact Consumer Price Index (CPI) data.

A new, large decrease in inflation could be revealed by the UK CPI inflation report, which would heighten expectations of a June interest rate cut by the Bank of England (BoE) and increase volatility surrounding the pound sterling.

How will the upcoming UK inflation report be perceived?

After rising by 3.2% in March, the headline annual UK Consumer Price Index is predicted to decline significantly to rise by 2.1% in April. The reading would be nearly at the BoE’s 2.0% objective, the lowest since July 2021.

Core CPI inflation is predicted to sharply slow down and fall to 3.6% YoY in April from 4.2% in March. In the meantime, the British monthly CPI is predicted to increase by 0.2% during that time, down from the 0.6% acceleration that occurred previously.

One of the main causes of the steep slowdown in UK inflation may be the significant drop in the Ofgem energy price ceiling. Additionally, analysts predict that services inflation, which is one of the most problematic aspects of price increase and a source of anxiety for many policymakers, would drop from 6.0% in March to 5.4% YoY even in April.

A more substantial decline than anticipated in both headline annual inflation and services inflation may solidify the BoE’s June rate cut. As of right now, money markets are putting in a 60% chance that the UK central bank will reduce borrowing costs next month.

Two members of the BoE dissented from the decision to lower interest rates by 25 basis points (bps) to 5% after the BoE’s May policy meeting, which resulted in the interest rates remaining at a 16-year high of 5.25%.

But in his news conference following the policy meeting, Governor Andrew Bailey of the Bank of England stated that “we are not yet at a point where we can cut the base rate.” He mentioned that there were two more inflation prints before the June meeting when discussing the likelihood of a rate cut.

Analysts at TD Securities (TDS) predicted that headline inflation in the UK will drop to slightly beyond the 2% target in April, mainly due to a further 13% reduction in Ofgem’s energy price ceiling. The base effects in core products should assist in the core’s y/y decline to 3.6% (mkt: 3.6%).

According to the TDS analysts, “On services, we see sticky momentum, partly in hotels and airfares, keeping the y/y rate 0.1 ppts above the BoE’s forecast.”

 

What impact might the UK Consumer Price Index report have on the GBP/USD exchange rate when it is released?

On Wednesday at 06:00 GMT, the UK calendar will be highlighted by the CPI figures. Prior to the announcement of the inflation data, the US dollar and the pound sterling are trading close to the round number of 1.2700. As expectations of the US Federal Reserve’s (Fed) rapid interest rate cuts fade, the US Dollar Index is continuing to rise.

The market’s expectations of a June rate decrease by the BoE could be dashed by hotter-than-expected headline and core inflation statistics, which would strengthen the pound sterling. The GBP/USD pair may then continue to rise, maybe reaching the 1.2800 mark. On the other hand, if noticeably lower UK CPI data support BoE rate-cut predictions for the following month, GBP/USD may retest the 1.2600 demand region.

“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,” says Dhwani Mehta, Lead Analyst for FXStreet’s Asian Session. The 14-day Relative Strength Index (RSI), which is north of the midline and close to 67.0, supports the Pound Sterling’s positive outlook.

Dhwani continues, “To maintain the rebound trend, the pair has to break over the high of 1.2804 set on March 21. The psychological level of 1.2850 and the high of 1.2894 on March 8 are the upside targets. However, the 100-day SMA, or 1.2633, provides immediate support. A test of the 1.2585–1.2565, demand area, is possible below this level. The 200-day SMA, located at 1.2540, represents the last line of defense for buyers. Dhwani continues.