HomeContributorsFundamental AnalysisBritish Pound Drifting ahead of US Inflation Report

British Pound Drifting ahead of US Inflation Report

  • US inflation expected to remain steady
  • BoE likely to raise rates

US inflation expected to stay unchanged

The US release the April inflation report later today, and the consensus is that headline inflation will remain steady at 5.0%. The core rate is projected to tick lower to 5.5%, down from 5.6% in March. That would mean that the disinflation process has stalled, which would pose a major headache for the Fed in its quest to bring inflation back to the 2% target.

The Fed has signalled that it will pause rates next month and just a day ago the markets agreed, with just an 8% chance of a hike, according to the CME Group. That has jumped to 21% today, and I would expect further repricing upwards if today’s inflation release is hotter than expected. A strong report would likely give a boost to the US dollar.

BoE projected to raise rates

The Bank of England is expected to raise rates by 25 basis points on Thursday, which would bring the benchmark cash rate to 4.50%. The BoE hasn’t been able to rein in inflation, which is above 10%, despite an aggressive rate-tightening cycle of 11 straight hikes. Core inflation has been sticky, raising fears that inflation expectations will rise and make it even more difficult to contain inflation. The cost of living crisis has hampered growth, but as in the US, the labour market has been surprisingly resilient to the central bank’s relentless tightening.

The BoE remains, somewhat surprisingly optimistic about inflation, projecting that it will decline all the way to 4% by the end of the year. This optimism will be hard to maintain if we don’t see a drop in the April inflation report. There are expectations of a terminal rate of 4.75%, which means that the BoE would likely deliver its final hike of 25-bp at the June meeting.

GBP/USD Technical

  • 1.2573 and 1.2495 are providing support
  • 1.2676 and 1.2785 are the next resistance lines

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