FX.co ★ Pound sterling surges in response to UK inflation data

The pound sterling has instantly surged after the release of the latest CPI data. Prices spiked by 1.2% in April compared to March. Although prices have declined year-over-year, they have surpassed economists' expectations, indicating that inflation levels in the UK are far higher than anticipated. Notably, the prices of services have witnessed the most rapid growth in over three decades, fueling traders' expectations of an impending interest rate hike by the Bank of England.

The annual consumer price index for April stood at 8.7%, surpassing all economist estimates and the central bank's projection of 8.3%. Core prices, which exclude food, energy, and tobacco, surged by 6.8% last month, rising from 6.2% in March.

These numbers overshadow the fact that inflation has significantly decreased for the first time in eight months. However they have intensified pressure on the Bank of England to continue raising interest rates throughout the summer. Responding to the revised outlook, investors are now expecting interest rates to peak one basis point higher than previously predicted. With inflation proving more resilient than expected, it is projected that the central bank will raise interest rates to 4.75% from 4.50% in June.

Consequently, UK government bonds have declined, while the pound sterling has advanced. The yield on 10-year bonds surged by over 20 basis points, reaching 4.37% for the first time since the UK budget crisis last year. Moreover, the interest rate futures market expects the Bank of England raise to interest rates to approximately 5.5%, above the previously expected 5.1%.

Several economists had recently suggested that the Bank of England's committee might soon halt its rate hike cycle due to an anticipated record-breaking inflation drop, which was expected to be the largest in over three decades. However, it was clearly not as large as previously forecasted. Today's speech by Bank of England Governor Andrew Bailey is expected to surprise market players. If Bailey signals the continuation of a tight monetary policy, the pound is likely to maintain its upward trajectory. However, should the mentioned figures satisfy the Bank of England's expectations, the pressure on GBP/USD is expected to intensify.

Additionally, the report highlights that although inflation has noticeably decreased, it can be attributed to lower energy prices compared to 2022. However, this decrease has been partially offset by an increase in the prices of used cars and cigarettes. Overall, prices are significantly higher compared the corresponding period last year, with food prices nearing historical highs year-over-year.

From a technical analysis standpoint, GBP/USD remains under pressure. Only once the pair returns to 1.2460 can we anticipate potential upside movement towards 1.2510. A breakout of this level would set the stage for a more significant upward surge to 1.2540. If the pair declines, bears will strive to wrestle control near 1.2410. Should they succeed, a breakout below this range would weaken bullish positions, propelling GBP/USD towards the low of 1.2370 and potentially even 1.2330.

The bearish euro trend is still ongoing. To bring bulls back into the market, EUR/USD must hold on to 1.0760 and reclaim 1.0800. Doing so would allow the pair for a potential recovery towards 1.0840 and 1.0870. While the pair might advance further to 1.0905, it is unlikely to happen without support from positive macroeconomic data. If the instrument declines, bullish traders will likely take action only near 1.0760. If they are idle at this level, it would be a good idea to wait until the pair hits the low at 1.0720, or open long positions at 1.0670.