A wise source once said, “They were locked in a perpetual game of cat and mouse, each one chasing the other in an endless loop." Yes, this source is ChatGPT!
This metaphor briefly and successfully describes what is happening between the BoE and inflation rates in the UK.
The momentum of CPI started falling since October 2022 from a peak of 11.1%, to the current value of 8.7% (Figure 1). Based on Refinitiv Eikon, the SmartEconomics estimate is marking a further fall in value from 8.7% to 8.24% for the month of May 2023.
Figure 1: UK CPI YY actual (Yellow) vs SmartEconomics (Purple), Refinitiv Eikon 2020-2023
When comparing the bank rate changes in the UK (Figure 2) to the inflation figures, we notice a golden cross occurring between February and March, whereby the overall sentiment started to price in a possible soft-landing scenario.
Figure 2: UK CPI YY (Yellow) vs Bank Rate (Blue) UK Bank rate, Refinitiv Eikon 2020-2023
If this scenario proceeds and we see inflation figures dropping below the value of 8.4%, the BoE might follow in the footsteps of the Federal Reserve and start signaling a possible pivot in interest rates. If so, this might put some heavy weight on GBPUSD.
This scenario also depends on the Monetary Policy Summary, which will hold insights into the upcoming rate decision.
On the other hand, the UK’s inflation figures are over-reliant on gas prices. This also proves the recent drops in the inflation figures, which are partially backed by the extreme sell-off in natural gas prices.
However, natural gas is picking up in speed and has bounced off the $2.0MMBtu psychological level, and if this momentum proceeds, it might start working its magic on UK inflation.
Stay tuned for tomorrow’s UK CPI (YoY)release at 10:00 AM Dubai time (GMT+4).
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