Cable Performance Hinges on UK, US Data

The UK and US economies will see important data tomorrow that may guide expectations about monetary policy from the BOE and Fed, with the timing around rate cuts poised to move cable.

Dovish on Good News

​The BOE will release a barrage of economic data before the market opens tomorrow. Inflation data will be a primary focus as markets look forward to the timing of the bank's rate cuts. While early signs of economic recovery could push inflation modestly higher in the near term, the market expects confirmation that inflation continues its longer-term decline, consistent with recent commentary from Governor Andrew Bailey.

There is some uncertainty, however. Most economists forecast the first rate cut will occur after summer recess in August, whereas markets currently price in a 60% probability of a cut at the June meeting. Consequently, one group appears poised for potential disappointment depending on incoming data. Upcoming releases could help determine if policy retains a more hawkish or dovish bent. Notably, the dovish view has gained influence since the previous monetary policy decision, when Deputy Governor Dave Ramsden joined dissenters calling for lower rates.

CPI and FOMC Minutes

The UK April CPI is expected to decline to 2.1% from 3.2% due to energy price changes from the prior year. Core inflation excludes energy and is closely watched by the BOE for policy decisions. However, core CPI is also expected to come in lower at 3.6% from 4.2%.

Later on Wednesday, the Fed will publish minutes from its last meeting, at which policymakers decided to wait for more data before adjusting rates. Since then, inflation has come in lower than expected, with headline inflation declining for the first time in months. Investors will look for comments suggesting one weak inflation report could trigger the central bank to cut rates, with the market generally expecting the first Fed cut in September.

Cable's performance will likely depend on the timing of expected rate cuts between the two banks. Recent moves show a June cut for the UK and September for the US, allowing the currency pair to rise slightly.

Cable in Uptrend for Now

The GBPUSD currency pair has been trending upwards, approaching a breakthrough past the double-top of $1.2710. If it occurs, prices may rise to $1.2790 on the way to the peak of 1.2894. However, if prices slide below $1.2635 and the $1.26 handle, dropping under $1.2540 could trigger a more substantial drop to $1.2445.

Source: SpreadEx / GBPUSD

Key Takeaways

Tomorrow's releases from the UK and the US will provide insights that could impact expectations for upcoming policy decisions. The UK will report inflation and other data before markets open, with markets watching for confirmation that inflation continues its longer-term decline as signalled by the BOE. Most economists forecast the first BOE rate cut in August, while markets see a 60% chance of a June cut. Fed minutes may shed light on whether one soft inflation print could trigger an earlier-than-expected rate cut, with market pricing currently in the first cut in September. Cable's movement likely hinges on the timing of expected rate cuts between the two central banks.