Sterling came under modest pressure after UK inflation data undershot expectations in May, but the report is unlikely to materially alter the Bank of England’s policy outlook or the broader bullish case for some GBP crosses. Headline CPI held steady at 2.8% yoy, below expectations for a rise to 3.0% yoy, while monthly inflation slowed sharply from 0.7% mom to 0.2% mom. Core CPI edged up from 2.5% yoy to 2.6% yoy, but also came in below consensus forecasts of 2.7% yoy.
The softer-than-expected headline figures should ease concerns that inflation is reaccelerating more aggressively than policymakers anticipated. However, the details of the report were less reassuring. Services inflation, a key gauge of domestic price pressures watched closely by the BoE, accelerated sharply from 3.2% yoy to 3.7% yoy. While goods inflation slowed from 2.4% yoy to 2.0% yoy, the rise in services prices suggests underlying inflation pressures linked to wages and labor costs remain persistent.
As a result, the data are unlikely to change the outcome of Thursday’s BoE meeting. Policymakers are widely expected to leave Bank Rate unchanged at 3.75%, and the latest inflation figures probably do little to alter the balance within the Monetary Policy Committee. Hawks will continue to point to elevated services inflation as evidence that inflation risks remain skewed to the upside. More cautious members will focus on signs of slowing economic activity and softer headline inflation. The report may influence the tone of the debate, but it is unlikely to shift votes.
That distinction is important for Sterling. While today’s inflation miss may slow the currency’s recent rally, it does not materially undermine expectations that the BoE could still tighten policy later this year if services inflation remains elevated. Markets may push back the timing of such a move, but the broader tightening bias remains intact.
This backdrop continues to favor GBP/CAD. The policy gap between the BoE and Bank of Canada remains substantial, with UK rates at 3.75% compared with Canada’s 2.25%. Moreover, falling oil prices continue to weigh on the Canadian Dollar, while markets expect the BoC to remain on hold through year-end. Together, those factors provide a supportive fundamental backdrop for further GBP/CAD strength.
Technically, GBP/CAD’s rally from 1.8017 remains intact. A retest of the 1.8912 high should be seen next. A break there would target 100% projection of 1.8017 to 1.8694 from 1.8299 at 1.8976. Near-term outlook should remain bullish as long as support at 1.8554 holds, in case of retreat.
In the bigger picture, GBP/CAD found strong support from the rising channel that has guided price action since late 2023. The structure suggests the broader up trend from 1.4069 (2022 low) is still unfolding. A decisive break above 1.8912 would strengthen the case for a medium-term move toward 61.8% projection of 1.6355 to 1.8912 from 1.8017 at 1.9597.
