FX.co ★ GBP/USD: UK inflation growth report

Today, key data on inflation growth in the UK was published. In response to the publication, the GBP/USD pair reached a new daily high but quickly retraced back. Traders are hesitant to play against the greenback ahead of Federal Reserve Chairman Jerome Powell's speech, which he will deliver today in the House of Representatives. Nevertheless, the released report will make its presence felt again very soon, within the next 24 hours. Tomorrow, June 22, the Bank of England will hold its regular meeting, and based on expectations, the central bank is likely to raise interest rates by 25 basis points. Moreover, considering the dynamics of underlying inflation, the regulator may not only raise rates but also announce further steps in that direction.

Almost all components of the release came out in the "green zone," surpassing the forecasted estimates. The reaction of GBP/USD was mixed, primarily due to the renewed strength of the U.S. dollar index. The greenback alternates between strengthening and easing pressure on the pair, awaiting Powell's remarks. However, overall, today's report bolstered the positions of the British currency, increasing the likelihood that the Bank of England will not hit the brakes this month and will instead hit the accelerator.

The British inflation indeed surprised with its green color. The overall Consumer Price Index (CPI) on an annual basis reached 8.7%, while most experts predicted a decrease to 8.4%. In monthly terms, the overall CPI decreased to 0.7%, with an anticipated decline of 0.5%. According to the UK's Office for National Statistics, the largest contributions to the monthly inflation came from price increases in airfares, recreation and culture goods and services, as well as used cars.

However, particular concern arises from the core inflation. The core CPI, which excludes food and energy prices, jumped to 7.1% in May, while most analysts forecasted a decline to 6.7%. This is a multi-year record, the strongest growth rate of the indicator since 1992. Additionally, the indicator demonstrates an upward trend for the second consecutive month, contrary to predictions of a decline.

The breakdown of this component indicates that price growth in the services sector accelerated to 7.4% (from the previous value of 6.9%), inflation on goods reached 10% (9.7% in April), and fuel prices rose by 13.1% (compared to a growth of 8.9% in the previous month).

Retail prices (RPI index) in the past month rose by 11.3% on an annual basis (compared to 11.4% growth in April). It is worth noting that employers in the UK use the RPI index during wage negotiations.

What does the release indicate?

The inflation growth, especially the rise in core inflation, will not allow the Bank of England to maintain its monetary policy in its current form. According to most experts surveyed by Reuters, the English regulator is expected to raise interest rates by 25 basis points in June, reaching a 15-year high (4.75%).

It is worth noting that this survey was conducted before today's release, while bolder assumptions have been voiced in the market post-factum. In particular, experts from Commerzbank stated that the unexpected rise in inflationary pressure increases the chances of a 50 basis point interest rate hike. However, in my opinion, the Bank of England will stick to a 25-point rate hike but will tighten its rhetoric, declaring its hawkish stance.

After all, it's not only the CPI growth report that contributes to strengthening the hawkish sentiment. Recently published labor market data also came out in the "green zone," including the pro-inflationary indicator. The average earnings level (excluding bonuses) increased by 6.5%, surpassing the projected growth of 6.1%. With bonuses included, the indicator surged to 7.2% (against a forecasted growth of 6.9%)—the strongest growth rate since July 2021.

The other components of the release also exceeded expectations. Specifically, the unemployment rate decreased to 3.8%, contrary to forecasts of an increase, and the number of jobless claims plummeted into negative territory (registering at -13,000), defying predictions of a 22,000 increase.

Conclusions

Buyers of GBP/USD received a powerful fundamental trump card today. The strong inflation growth report will "untie the hands" of the members of the Bank of England. There is almost no doubt that the central bank will increase the interest rate by 25 basis points tomorrow. It is also certain that the accompanying statement and Andrew Bailey himself will adopt a more stringent rhetoric.

Despite the rise in British inflation, the pound did not benefit from the situation. Powell is to blame for this, as today, he can either strengthen or weaken the positions of the dollar bulls. In anticipation of his speech in Congress, GBP/USD traders refrained from further upward movement and rushed to lock in profits, thus dampening the upward impulse. However, one should approach the downward correction with caution: if Powell does not become an ally of the greenback (which is highly likely), the spring may unwind in the opposite direction. In that case, buyers of the pair will not only return to the 1.28 area but also test the resistance level at 1.2870 (the upper line of the Bollinger Bands indicator on the D1 timeframe).