Bearish Cable Setup Contingent Upon Softer UK CPI

April CPI Data is a Key Determinant for a Potential June Cut

On Wednesday, UK CPI data is expected to drop for both headline and core measures but the consensus estimate for the headline measure anticipates a massive drop from 3.2% to 2.1%. Such a lofty expectation could see the figure land up disappointing the market (coming in higher) but a small miss to the upside would still represent phenomenal progress.

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April was a notable time last year as services inflation re-accelerated more than expected and continued to do so in May and June, forcing the Bank of England to hike interest rates at its June 2023 meeting. The guidance ahead of this year’s print is that the data may turn out to be less extreme given the overall lower level of headline prices. Services prices are often index-linked to such prices meaning the pass through effect isn’t expected to be as severe as in 2023.

UK Services CPI Year-on-Year Change (April -July)

Source: Refinitiv, prepared by Richard Snow

A print in line with expectations/softer UK inflation print could provide the catalyst for sterling bears after GBP/USD price action appears to be waning beneath the 1.2736 marker. Given the lofty inflation expectations, even a narrow miss (to the upside) may have a bearish effect given the overall progress made in getting headline inflation near to 2%.

The upper wicks and small candle bodies could be symptomatic of waning bullish momentum with the potential to move lower, given the right catalyst. Should prices find a ceiling at 1.2736, a move to the downside remains constructive upon a better-than-expected CPI print. The pound has enjoyed a period of gains against the dollar since the lower US CPI print for April. Consider the short bias invalidated at 1.2800, with support (short target) at 1.2585.

GBP/USD Daily Chart

Source: TradingView, prepared by Richard Snow

Markets currently view a June cut as a 50/50 outcome ahead of UK CPI – enhancing its importance in the lead up to the central bank meeting. A softer CPI print, followed by dovish comments from BoE officials creates an environment where the first rate cut since the hiking cycle may be upon us sooner than expected. However, if inflation fails to match up to the lofty expectations, pricing may reflect a preference for August or even later in the year.

Implied Rate Cuts into Year End (in Basis Points)