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April UK inflation figures set the tone from the start of trading. The Bank of England, with a leading role for chair Bailey, hyped the number way in advance as coming a long way in the direction of the 2% inflation target. That was because of the anticipated drop in the cap on regulated energy prices which would put the UK on a European instead of US-style inflation trajectory. BoE comments were split on following Frankfurt with a June rate cut or keeping rates higher for longer like the Fed. The May policy meeting and report contained arguments for both scenarios. This morning’s inflation report settles the debate and calls for surrender by the BoE Chair. Headline inflation slowed from 0.6% M/M to 0.3% M/M but consensus hoped for a 0.1% outcome. The Y/Y figure slowed from 3.2% to 2.3% instead of 2.1%. The picture becomes more troublesome when looking at core measure. UK core CPI accelerated from 0.6% M/M to 0.9% M/M with the Y/Y-number only retreating from 4.2% to 3.9% instead of 3.6%. Services inflation even came in at an astonishing 1.5% M/M with the annual figure remaining sticky at 5.9% (from 6%). UK markets drew firm conclusions. The market implied probability of a June rate cut fell from roughly 50% to barely 15%. A first cut is now only (completely) discounted by the November (!) BoE policy meeting. UK gilts obviously underperformed German Bunds and US Treasuries. UK yields today rise by 8.9 bps (30-yr) to 12.7 bps (2-yr) compared with 4-5 bps increases in Germany and 3-4 bps gains in the US. Sterling outperformed with EUR/GBP in first instance dropping from 0.8540 to 0.8520, but now gradually looking for a test of the (strong) support zone at 0.85. Cable set a new short term high around 1.2750 before being called back by today’s genuine USD strength (EUR/USD 1.0835). In a broader perspective, today’s UK CPI figures make you wonder whether Europe (alone) can buck the global trend of stickier (core) inflation. Tomorrow’s PMI surveys and Q1 wage data are a first reference. EMU PMI’s showed the EMU economy gradually coming back to live in recent months with price gauges already running at highest levels in (over) a year. Q1 wage numbers will like remain sticky at levels around 4.5% annualized. Put against today’s context, this could cause some further underperformance of the front end of the European curve.

News & Views

Polish sold industrial output, which tends to be very volatile in M/M figures, declined by 2.2% M/M in April but this still lifted the Y/Y-measure to a higher than expected 7.9%. In the period January-April of 2024, production of industry was 0.9% Y/Y. An increase in sold production was reported in 31 (out of 34) industry divisions. Polish employment was unchanged in April from March, but declined 0.4% Y/Y. Average wages eased slightly M/M in April (-1.6% M/M). According to the statistical office, this decrease was due to a higher scale of payments (special payments) in the previous month. Y/Y average wages rose 11.3%, from 12% in March. The rise was marginally softer than expected. In January, the statutory minimum salary was raised by 17.8%. With headline and core inflation in April at respectively 2.4% and 4.1%, Y/Y this still suggests a solid rise in disposable income. The zloty is falling prey to profit taking (EUR/PLN 4.268 from 4.2525) but a similar move is visible in the forint and to a lesser extent in the Czech koruna. Today’s data won’t change assessment of the National bank of Poland that it will keep rates unchanged until the end of the year.

In its monthly report, the Bundesbank indicated that negotiated wages in the first quarter rose 6.2%. The rise was higher than expected. The data suggest that the euro-wide negotiated wage data of the ECB might be higher than expected tomorrow. In a broader analysis of the economy, the Buba also indicated that its expects inflation to rise again in May and to stay at slightly higher level in the coming months. While this is mainly due to base effects, the Buba also warns that there remain risks to the disinflation process because of wage rises.

Graphs

Japanese 10-yr yield rises above 1% for the first time since 2012

EUR/GBP: ready to test 0.85 support on sticky inflation print

UK 2-yr yield tries to break the downward trend with money markets pushing a first rate cut to November

Brent crude testing the recent downside as questions on global growth remain

Inflation in the UK exceeded forecasts, making traders and investors cautious about the prospects for policy easing in the coming months.

Consumer prices rose by 0.3% m/m vs. 0.2% expected. Annual inflation slowed to 2.3% last month from 3.2% in March. This is the lowest level in two years, comfortably close to the Bank of England’s target but above the forecast of 2.3%.

Core inflation has been gently slowing over the past 12 months but has only fallen to 3.9% y/y from a peak of 7.1% y/y. Meaningful progress, but quite far from the desired level. In our view, the high growth rate of the core price index is the most important factor pushing forward the date of policy easing.

At the same time, producer prices have been at comfortably low levels for an extended period. The producer price index loses 1.5% y/y on entry, having remained in negative territory for the past 11 months. The Output Price Index is rising at a rate of 1.1% y/y, accelerating over the past three months from a low of -0.2% in February. Nevertheless, this is a relatively low rate that does not prevent policy easing.

Thus, the most intense inflationary pressure is centred on the retailers’ stage. This is probably the result of rising labour costs or an attempt to compensate for narrow margins in previous years.

The persistence of inflation translating into tighter monetary policy is causing pressure on the UK equity market. The FTSE100 is losing around 0.75%, smoothly forming a peak during the previous week. Inflation data looks like a worthwhile reason to start a correction that could take the index back to 8200 or even 8000 from the current 8360 before we see buying activity.

At the same time, this is good news for the pound, which hit a 2-month high against the dollar, rising above 1.2750 shortly after publication. This is an important area of resistance for the past 11 months. A further continuation of inflation higher than G10 currencies has the potential to lift GBPUSD to the next leg up to the 1.30-1.40 area. Should the economy stumble, and with it inflation, this would remove the divergence in monetary policy and put pressure back on the pound, leaving it in the 1.20-1.27 range.

The British pound edged higher earlier today but has pared most of those gains. GBP/USD is trading at 1.2703, up 0.06% early in the North American session.

UK inflation declines less than expected

UK inflation fell sharply in April, falling to 2.3% y/y. This was down from 3.2% in March and the lowest rate since July 2021 but higher than the market estimate of 2.1%. On a monthly basis, inflation dropped to 0.3%, down from 0.6% in March and just above the market estimate of 0.2%. Food prices fell while higher gasoline prices and services inflation contributed to upward pressure on CPI.

Core CPI eased to 3.9% y/y, down from 4.2% in March but above the market estimate of 3.6%. The monthly reading surprised with a 0.9% gain, higher than the March gain of 0.6% and above the market estimate of 0.7%.GBP

The inflation report was on the whole positive but the rise in April core CPI left investors with a sour taste and dampened expectations for rate cut in June. The money markets have lowered pricing of a June rate cut to just 18%, compared to 50% on Tuesday.

The Bank of England has made inflation its number one priority and can point to an inflation rate that is closing in on the 2% target, after hitting a high of 11.2% in October 2022. The private sector is groaning under the weight of interest rates at 5.25% and the BOE has signaled that a rate hike is a possibility this summer but may have to delay an initial rate cut to August, as inflation remains sticky.

In the US, we’ll get a look at the FOMC minutes of the meeting earlier this month. The minutes may provide insight into the mood of FOMC members. Based on the message that the Fed has been steadily feeding the markets, the minutes will likely be hawkish. The markets have priced in a rate hike in September but Fed members have pointed to high inflation as a reason to maintain rates in restrictive territory until there is clear evidence that inflation will remain sustainable around the 2% target.

GBP/USD Technical

• There is support at 1.2641 and 1.2570
• 1.2772 and 1.2843 are the next resistance lines

Daily Pivots: (S1) 155.75; (P) 156.03; (R1) 156.56; More...

No change in USD/JPY's outlook and intraday bias stays neutral. Price actions from 160.20 are seen as a corrective pattern. On the upside, break of 156.78 will resume the rise from 151.86, as the second leg, to 100% projection of 151.86 to 156.78 from 153.59 at 158.51. On the downside, below 153.59 will target 151.86 and below as the third leg.

In the bigger picture, a medium term top might be formed at 160.20. But as long as 150.87 resistance turned support holds, fall from there is seen as correcting rise from 150.25 only. However, decisive break of 150.87 will argue that larger correction is possibly underway, and target 146.47 support next.

Daily Pivots: (S1) 0.9092; (P) 0.9104; (R1) 0.9122; More....

USD/CHF's rebound from 0.8987 extends higher today, and intraday bias stays on the upside. Further rally would be seen to 0.9223 resistance. On the downside, below 0.9086 minor support will turn intraday bias neutral first. Further break of 0.8987 will resume the fall from 0.9223 to 38.2% retracement of 0.8332 to 0.9223 at 0.8883.

In the bigger picture, price actions from 0.8332 medium term bottom are tentatively seen as developing into a corrective pattern to the down trend from 1.0146 (2022 high). Rejection by 0.9243 resistance, followed by sustained break of 38.2% retracement of 0.8332 to 0.9223 at 0.8883 will strengthen this case, and maintain medium term bearishness. However, decisive break of 0.9243 will argue that the trend has already reversed and turn medium term outlook bullish for 1.0146.

Daily Pivots: (S1) 1.0840; (P) 1.0857; (R1) 1.0872; More...

EUR/USD dips notably today but stays above 1.0810 resistance turned support. Intraday bias remains neutral and further rally is still in favor. On the upside, break of 1.0894 will resume the rise from 1.0601 to 1.0980 resistance. Decisive break there will confirm that whole fall from 1.1138 has completed at 1.0601 already. However, firm break of 1.0810 will dampen this bullish case, and turn bias back to the downside.

In the bigger picture, price actions from 1.1274 are viewed as a corrective pattern. Fall from 1.1138 is seen as the third leg and could have completed. Firm break of 1.1138 will argue that larger up trend from 0.9534 (2022 low) is ready to resume through 1.1274 high. On the downside, break of 1.0601 will extend the corrective pattern instead.

• On the back of continued strong inflationary pressures in the service sector, as evident in the April inflation print, we revise our BoE call. We now expect the first 25bp cut in August (prev. June).
• We expect quarterly cuts from August and through 2025, leaving the Bank Rate at 3.75% by the end of 2025.

Inflation in April surprised significantly to the topside across the board, relative to both the consensus expectation and the BoE's forecast from the May monetary policy report. Headline came in at 2.3% y/y (cons: 2.1%, BoE: 2.1%, prior: 3.2%,), core at 3.9% (cons: 3.6%, prior: 4.2%) and services a 5.9% y/y (cons: 5.4%, BoE: 5.5%, prior: 6.0%).

Although the year-on-year measures dropped notably due to base effects from energy prices and April-specific annual price adjustments (e.g rents, telephone contracts and tv licence fees), the underlying momentum remains strong. The big driver was services with a broad range of services such as hotels, restaurants and recreation and culture services delivering upward contributions. Service inflation remains key for the BoE as it uses it as a measure of inflation persistence alongside tightness of the labour market and wage growth. Worryingly, alongside the big BoE forecast miss, the momentum in service inflation picked up in April (see chart 1). Likewise, wage growth remains elevated with the labour market still tight by historical standards.

Following today's topside surprise and the May print unlikely to deliver an equally large downside surprise to sway the majority of the MPC to vote for a cut, we now expect the first 25bp cut in August.

Our call. We now expect the BoE to deliver the first cut of 25bp in August (June previously). Given the later start to the cutting cycle, we subsequently now only expect one 25bp cut in the following quarter, totalling 50bp of cuts for 2024 (previously 75bp). Markets are pricing 40bp for the remainder of the year with the first 25bp cut fully priced by November.

Daily Pivots: (S1) 1.2689; (P) 1.2708; (R1) 1.2729; More...

Intraday bias in GBP/USD remains on the upside for 100% projection of 1.2298 to 1.2633 from 1.2445 at 1.2780. Firm break there will target 1.2892 resistance next. However, break of 1.2685 will minor support will turn bias back to the downside, for retreat to 55 4H EMA (now at 1.2644).

In the bigger picture, price actions from 1.3141 medium term top are seen as a corrective pattern. Fall from 1.2892 is seen as the third leg which might have completed already. Break of 1.2892 resistance will argue that larger up trend from 1.0351(2022 low) is ready to resume through 1.3141. Meanwhile, break of 1.2298 support will extend the corrective pattern instead.

Sterling climbed broadly today after data showed that UK disinflation progress was slower than anticipated, with services inflation remaining persistently high. This development dashed hopes for an imminent rate cut by BoE, causing the odds of a rate cut in June to plummet from around 50% to below 20%. Despite this, the notable declines in both headline and core CPI keep the possibility of a rate cut at the BoE's August meeting alive.

While the Pound is performing well, it has been outpaced by New Zealand Dollar and US Dollar. Kiwi surged earlier following hawkish RBNZ statement and forecast. The central bank left OCR unchanged but signaled an increased likelihood of another rate hike this year and delayed the projected timing of the first rate cut to the latter half of 2025.

Dollar is gaining strength amid mild risk aversion and recovery in treasury yields. The focus now shifts to minutes from FOMC meeting. Traders will be looking for hints about the timing of the first rate cut by Fed, although it is unlikely they will find any new information. The minutes are expected to reinforce Fed's stance that rates will remain elevated for an extended period, with the next move likely being a cut, but timing contingent on further economic data.

On the flip side, Swiss Franc is the worst performer of the day, driven by expectations that the yield gap between Switzerland and other major economies will persist. Euro follows as the second worst, with ECB still on track for a rate cut in June, the Japanese Yen ranks third worst. Canadian Dollar and Australian Dollar are positioned in the middle of the performance spectrum.

Technically, Bitcoin is quickly approaching 73812 record high as near term rally extends. Decisive break there will confirm up trend resumption for 61.8% projection of 24896 to 73812 from 65780 at 86717 next. On the downside, break of 65780 support will delay the bullish case and bring more consolidations first.

In Europe, at the time of writing, FTSE is down -0.69%. DAX is down -0.32%. CAC is down -0.69%. UK 10-year yield is up 0.1178 at 4.245. Germany 10-year yield is up 0.048 at 2.552. Earlier in Asia, Nikkei fell -0.85%. Hong Kong HSI fell -0.13%. China Shanghai SSE rose 0.02%. Singapore Strait Times fell -0.19%. Japan 10-year JGB yield rose 0.0160 to 1.001.

Bundesbank sees German economy gradually gaining momentum in Q2

In its monthly report, Bundesbank indicated that Germany's economic output is "likely to increase slightly again" in Q2. The general trend suggests that the economy is gradually "picking up speed," with positive impulses expected from private consumption and a "further recovery" in the service sector.

The Bundesbank also noted that energy-intensive sectors in industry could "recover moderately." However, it highlighted that a broad-based increase in new orders is still lacking, which is necessary for a thorough recovery. The improved business expectations in the manufacturing sector are anticipated to significantly boost production only in the second half of the year.

Additionally, Bundesbank expects inflation to rise again in May and fluctuate at a slightly higher level in the coming months. This is primarily due to base effects, such as the introduction of the "Germany Ticket" in local passenger transport last May, which will influence year-on-year comparisons.

UK CPI down to 2.3% in Apr, core CPI falls to 3.9%, both above expectations

UK CPI slowed sharply from 3.2% yoy to 2.3% yoy in April, but above expectation of 2.1% yoy. Core CPI (excluding energy, food, alcohol and tobacco) slowed from 4.2% yoy to 3.9% yoy, above expectation of 3.6% yoy.

CPI goods annual rate turned negative from 0.8% yoy to -0.8% yoy. But CPI services annual rate eased just slightly from 6.0% yoy to 5.9% yoy.

RBNZ holds steady at 5.50% but signals potential hike later in 2024

RBNZ kept Official Cash Rate unchanged at 5.50%, as widely anticipated. However, RBNZ surprised markets by raising its projected rate path, suggesting the possibility of another rate hike later this year. Additionally, the timeline for rate cuts has been pushed further into the latter half of 2025. According to key forecast variables, the OCR is expected to rise from the current 5.5% to 5.7% in Q4 2024 before declining to 5.4% in Q3 2025.

Minutes of the meeting highlighted that members agreed on the "significant upside risk" posed by persistent non-tradable inflation. They noted that the influence of recent inflation outcomes on future inflation expectations is critical for price setting, wage expectations, and the stance of monetary policy. Moreover, slower output growth than currently assumed could reduce the pace at which spending can grow without increasing inflationary pressures.

"Monetary policy may need to tighten and/or remain restrictive for longer if wage and price setters do not align with weaker productivity growth rates," the minutes stated.

Japan's exports rise 8.3% yoy in Apr, imports up 8.3% yoy

In April, Japan's exports increased by 8.3% yoy to JPY 8981B, falling short of expected 11.1% growth. Nonetheless, this marks the fifth consecutive month of export growth and sets a record for April. Key contributors to this growth included hybrid cars, semiconductor-making equipment, and chips.

Imports also rose by 8.3% yoy to JPY 9443B, slightly below expected 9.0% increase, and set a record for the month. The weak Ten continues to inflate import costs for resource-scarce Japan, with crude oil prices jumping 17.7% yoy, compared to a 2.6% yoy increase in Dollar terms. This resulted in a trade balance deficit of JPY -463B.

On a seasonally adjusted basis, exports rose 0.9% mom to JPY 8843B, while imports decreased by -0.5% mom to JPY 9403B, leading to a trade balance deficit of JPY -561B.

GBP/USD Mid-Day Outlook

Daily Pivots: (S1) 1.2689; (P) 1.2708; (R1) 1.2729; More...

Intraday bias in GBP/USD remains on the upside for 100% projection of 1.2298 to 1.2633 from 1.2445 at 1.2780. Firm break there will target 1.2892 resistance next. However, break of 1.2685 will minor support will turn bias back to the downside, for retreat to 55 4H EMA (now at 1.2644).

In the bigger picture, price actions from 1.3141 medium term top are seen as a corrective pattern. Fall from 1.2892 is seen as the third leg which might have completed already. Break of 1.2892 resistance will argue that larger up trend from 1.0351(2022 low) is ready to resume through 1.3141. Meanwhile, break of 1.2298 support will extend the corrective pattern instead.

Economic Indicators Update