Inflation data add pressure on the Bank of England

Today's UK inflation data puts extra pressure on the Bank of England, which already has tomorrow will decide what to do with interest rates. A move up by 25 basis points is almost certain, the market is starting to speculate about a possible stronger move. GBP strengthened in relation to USD in the first minutes after the publication. There is currently movement in the opposite direction.

Base effects

This is another month when data on inflation in the UK surprise with a higher score. The headline reading remained high at 8,7 percent. y/y (a decline to 8,4 percent was expected), while the core index increased from 6,8 percent. y/y previously to 7,1 percent. y/y

At the moment, the BoE is focusing its attention on service inflation. It is it that shows permanent, less volatile price trends. Service contributions to CPI is currently 0,3 percentage points higher than it resulted from earlier forecasts of the central bank. The increase in the indicator is not the result of an increase in a single category.

Also in the UK, headline inflation, as in other parts of Europe, should decrease over the next few months. We're going to have a lot of base effects here. Last year, in June, gasoline prices in the "Islands" increased by nearly 10 percent. Currently, they are falling, and additionally, electricity and gas bills for households will be reduced in July. core inflation should reach its peak soon, although in this case the decline will not be as dynamic.

Tomorrow's decision in the light of today's data seems to be even more interesting. An increase of 25 basis points is rather certain. It will probably be supported by 7 members, Tenreyro and Dhingra will rather vote for no changes. An upward move in August is also real. The next ones will depend on the data, so we can't be sure here. The market will try to find out how much decision makers are concerned about the dynamics of price growth. If there is a suggestion that the final rate may go well above 5 percent. then GBP will gain, otherwise we may see a correction in the pound.

Strong pound for longer?

At this point, the market is pricing in almost six more rate hikes in the UK, although I think the market is slightly overestimating the BoE.

The pound may still gain more against the USD than the EUR. The market at the moment judges that this is what the European institution is more "hawkish" than "American", therefore, it can be concluded that there is a greater divergence between the monetary policy of the Fed and the BoE than between the ECB and the BoE.

Na EUR / GBP there has been a downward trend since May, in which the rate is likely to continue for some time. Recently, the horizontal support resulting from the lows from the end of last year was broken and the rate was at its lowest level since August 2022. GBP/USD is dominated by gains and the pound against the USD has been recently strongest since April last year. However, recent gains may be corrected in the short term. In the longer term, I assume increases above the level of 130,00.

Source: OANDA TMS Brokers