HomeContributorsFundamental AnalysisPound Traders Lock Their Gaze on the UK Inflation Data

Pound Traders Lock Their Gaze on the UK Inflation Data

With inflation in double digits, the BoE is among the few major central banks that are not expected to push the cut button during 2023. With that in mind, pound traders may pay close attention to the UK CPI figures for March, due out on Wednesday at 06:00 GMT. Will the March numbers add credence to expectations of more hikes by the BoE? And what will they mean for the pound?

Investors expect more hikes by the BoE and no cuts at all

Following the February CPI numbers, where headline inflation accelerated to 10.4% y/y, BoE policymakers did not hesitate to push the hike button one more time when they met on March 23. They raised interest rates by 25bps and noted that since the February meeting, inflation has surprised significantly on the upside and that the near-term path of GDP is likely to be stronger than previously expected. More importantly, they appeared willing to raise rates further if there was evidence of more persistent price pressures.

With all that in mind, investors are likely to lock their gaze on the CPI numbers for March next week, as they try to figure out how the BoE may proceed with monetary policy henceforth amidst expectations of rate reduction by other major central banks, like the Fed and the BoC. Currently, investors assign a 65% probability for another quarter-point hike in May, with the remaining 35% pointing to a pause. They are also seeing another increase of the same size beyond May before the Bank steps to the sidelines. That said, the interesting part is that market participants do not expect the BoE to proceed with any rate reductions before the end of this year.

Small slowdown unlikely to alter hike expectations

According to the S&P Composite PMI, prices charged by UK firms continued to ease as softer cost pressures have started to pass on to consumers. However, many businesses suggested that ongoing wage inflation and uncertainty about energy costs had limited their ability to discount prices. Thus, although this implies downside risks to Wednesday’s data, a small slowdown may not be enough to dramatically alter expectations around the BoE’s future course of action. What’s more, with the year-over-year change in oil prices hovering into negative territory, a bigger slide in the headline rate than in the core will not come as a surprise.

Pound may continue to outperform the dollar

Combined with Governor Bailey’s recent remarks that he now expects the UK to avoid a recession this year, a headline CPI rate near double digits and a core one at around three times the BoE’s objective may allow market participants to continue pricing in more rate increases. The pound could stay supported, especially against currencies whose central banks are anticipated to start cutting interest rates later this year. With the Fed seen reducing US rates by around 50bps by year end, one of them may be the US dollar.

From a technical standpoint, pound/dollar remains in uptrend mode, currently hovering near the high of April 4 at 1.2525. A break above that zone would confirm a higher high and may encourage the bulls to climb towards the high of May 27, 2022, at around 1.2670. If there are no sellers to be found near that zone, a move higher may carry larger bullish implications, perhaps setting the stage for advances towards the 1.2975 area, which acted as key support between March 14 and April 20, 2022.

On the downside, the move signaling that the bears have woken up may be a dip below the low of April 10 at 1.2340. Such a move would confirm a lower low on the daily chart and could initially allow declines towards the low of March 24, at around 1.2190. If that hurdle also gets broken, the decline may then continue until the pair hits the 1.2025 area, which offered support on March 15 and 16.

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