UK Inflation Proves Too Hot to Handle in April, Unravelling Rate Cut Bets

UK Inflation, GBP/USD Analysis

Inflation Proves Too Hot to Handle in April, Unravelling Rate Cut Bets

The April print was identified as a potential hurdle for the Bank of England (BoE) after last year’s print marked the start of a reacceleration in inflation pressures that forced another rate hike from the BoE.

It was hoped that lower headline inflation leading up to the April 2024 print would have a cooling effect on services inflation. That proved not to be the case. Monthly and yearly inflation measures for the services sector surpassed not just the average estimate but also the maximum estimate within the projection data.

Headline CPI printed above expectations but has made significant headway within the overall disinflationary process. Core CPI (YoY) also moved lower but not by as much as the headline measure, from 4.2% to 3.9% (est. 3.6%)

Source: Refinitiv

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The incoming data has some meaningful ramifications for rate cut bets and the pound. Yesterday afternoon, the market expected a little over 50% chance that June would be appropriate for the first rate cut by the BoE. Now, that has dwindled to a lowly 14% and has shifted expectations of a rate cut from August to November. Additionally, expectations of two rate cuts this year have retreated to just one with the potential for a second.

Rate Cut Expectations (in Basis Points, ‘Bps’)

Source: Refinitiv

GBP/USD Strengthened after Hot CPI Print

GBP/USD naturally witnessed a move higher on the release of the hot CPI data, trading above the 1.2736 prior swing high (November 2023) but pulling back beneath it as the dust settles.

GBP/USD 5-Minute Chart

Source: TradingView, prepared by Richard Snow

GBP/USD revealed hints of bullish fatigue in the lead up to the data print as the daily candle wicks became more pronounced ahead of the 1.2736 level and daily trading ranges contracted. However, the data surprise provided a bullish catalyst, sending the pair higher.

1.2800 becomes the next level of resistance with 1.2585 the next level of support – around the 50-day simple moving average (SMA). The pair now treads dangerously close to overbought territory on the RSI meaning resultant momentum will need to be closely monitored for the risk of a pullback.

GBP/USD Daily Chart

Source: TradingView, prepared by Richard Snow

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EUR/GBP Remains One to Watch Ahead of the June ECB Meeting

The hot UK CPI data propelled the pair lower, with trendline support proving not to be an issue. EUR/GBP closed yesterday marginally below the trendline acting as support, but has broken through it with ease today thus far. The most imminent level of support becomes 0.8515 – the level that propped up the pair in July and August of 2023 and for most parts of 2024 too. The prior trendline support turns into trendline resistance, in the event of an immediate pullback.

EUR/GBP Daily Chart