UK CPI Preview

After the BOE's "dovish hike" attention is on whether rates have had any impact on inflation, or whether it has kept rising.

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The BOE market reaction

The markets were expecting a more aggressive move by the BOE, so there was an initial pullback following the announcement. However, once traders got a better look at what it meant for future rate hikes, the pound clawed back some of its strength. In particular, the rate gap between the sterling and the yen continues to widen and is expected to do so fairly consistently for at least the next several months.

The main issue is, of course, inflation; and the BOE revised its guidance about inflation once again, suggesting that it will remain high for longer than previously expected. Not only that, but that inflation would continue to rise through the summer, potentially not peaking until well into the third quarter. Naturally increased spending by the government to mitigate some of the inflationary effects wouldn't help with this scenario.

What to look out for with CPI

Where there can be some relief for the BOE is a widening of the gap between headline inflation and core inflation. Although higher prices in fuel and food impact households more directly, if core inflation is on the downswing, it could mean that higher rates are starting to bite and prices might be nearing the top.

The UK's annual inflation rate is expected to rise to 9.1% from 9.0%, driven by a 0.6% monthly increase in prices. But core inflation is forecast to fall to 6.0% from 6.2%, thanks to a slower 0.6% monthly growth in prices.

GBP/JPY outlook

GBP/JPY has ranged largely in May and June (so far), falling from 168.70 to 155.50 and then rising to 168.80 only to slide back down to 160.00. It now trades near 165.00. The high volatility suggests fast moves could continue to print above the 200-day average of 157.33. Major support lays a tad higher, at 157.80.

The last downward leg to 160.00 was led by divergence, and if the SMA weakens,155.50 will be the next level of attention. Inversely, the top of 168.80 is major resistance, so, if bulls recapture 165.00, chances of revisiting the swing high will increase. Of note is the bullish pin bar formed off the psychological support, following an inside bar pattern.

Source: Spreadex trading platform

Key takeaways

The BOE announced a decision to hike aggressive-less and that inflation would continue to be high for an extended period. Core inflation is slowing though, which could mean that the BOE is starting to have some effect on prices. If the CPI release shows core inflation continuing to fall prices might be nearing a top.