UK CPI Preview

With inflation expected to tick higher tomorrow, the question is whether the BOE is doing enough, and will it prompt a rethink in monetary policy strategy.

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Getting a handle on the situation

While politicians are distracted over the leadership championship in the Commons, the British people are seeing prices of everyday goods and services continuing to rise. The BOE was the first of the major central banks to start trying to deal with the situation, but CPI has increased even as monetary policy keeps getting tighter.

Other central banks have started raising rates by multiples, with the Fed expected to raise rates by 75bps at the end of the month, and the ECB by 50bps in September. But despite the tough talk, the BOE has only done 25bps increments per meeting. A week ago, BOE’s Governor Andrew Bailey promised to do whatever it takes to get rates under control. But, does that mean a 50-basis point hike, finally?

It could be up to CPI data

The unemployment data yesterday remained largely steady, with average earnings ticking up a bit. The dreaded ‘wage-price spiral’ is still threatening, but wages are still lagging behind inflation. There has been increasing discontent among workers, pushing for industrial action across the country, which could hurt productivity and, ironically, contribute to higher inflation.

With inflation forecasted to come in at 9.2% compared to 9.1% prior, the case for 50bps gets stronger. But the core rate is expected to slip a decimal to 5.8% from 5.9%. Unless those two figures align, it could simply mean that neither the hawks nor the doves win. The figure that could be more determinant is one that traders don't usually follow: Core PPI Output, which is expected to accelerate to 15.1% from 14.8%, suggesting that price pressures aren't going away.

Cable struggles to get through $1.20

GBP/USD has continued to print bearish price action over the course of the month and hit a fresh 28-month low at $1.1760 last week. Bulls attempted to recapture $1.20 but failed for now as $1.2040 formed resistance. The CPI report will likely determine whether the pound remains below there, or not.

The first major support following a potential breakdown stands at $1.1650; the post-covid crash weekly open. $1.1560 and $1.1410 are weekly close and low of the covid crash week, likely to have a significant impact on bearish price action next.
In the event the weekly high gives way, $1.2075 is near-term resistance, then the 20-week average of $1.2540. A bit higher lies the $1.2665 swing high of May 21st, and further up the $1.3160 swing low of December 12, which forms a cluster with the 50-week average. The bullish case is somewhat supported by an RSI divergence, which hasn’t been so oversold for years.

Source: Spreadex trading platform

Key takeaways

The British economy continues to experience inflation despite the BOE tightening monetary policy. With BOE struggling to control inflation on 25bps raises, there are renewed calls for bigger action as wages are still lagging behind inflation.

With inflation forecast to come higher than expected but core lower, the case for 50bps will get stronger if there is a misalignment or if Core PPI output accelerates more than expected.