UK CPI growth set to fall back near BoE target in April due to lower energy prices

■The UK Office for National Statistics will publish the CPI report on Wednesday.

■United Kingdom’s headline and core annual inflation are likely to fall sharply in April.

■The UK CPI data could affirm BoE June interest rate cut expectations, triggering a big move for the Pound Sterling.

The United Kingdom’s (UK) Office for National Statistics (ONS) will release the high-impact Consumer Price Index (CPI) data on Wednesday at 06:00 GMT.

The UK CPI inflation report could show a fresh significant decline in inflation, ramping up expectations of an interest-rate cut by the Bank of England (BoE) in June and fuelling intense volatility around the Pound Sterling.

What to expect from the next UK inflation report?

The headline annual UK Consumer Price Index is expected to increase by 2.1% in April, a significant cooling off from a 3.2% rise in March. The reading would be the lowest since July 2021, almost at the BoE’s 2.0% target.

Core CPI inflation is seen declining to 3.6% YoY in April from 4.2% in March, also set to see a sharp slowdown. Meanwhile, the British monthly CPI is likely to rise 0.2% in the same period, as against the previous acceleration of 0.6%.

The primary reason behind the sharp deceleration in UK inflation could be a notable decline in the Ofgem energy price cap. Economists also expect services inflation – one of the stickiest components of price growth and a concern for many policymakers – to fall to 5.4% YoY even in April, down from a 6.0% figure recorded in March.

A bigger-than-expected drop in headline annual inflation and services inflation could cement a BoE June rate cut. Money markets are currently pricing in a 60% probability that the UK central bank will lower borrowing costs next month.

Following its May policy meeting, the BoE maintained interest rates at a 16-year high of 5.25%, in a split decision with two members dissenting in favor of a rate reduction by 25 basis points (bps) to 5%.

However, BoE Governor Andrew Bailey, during his post-policy meeting press conference, said that "we are not yet at a point where we can cut the base rate." Commenting on the possibility of a June rate cut, he noted that there are two more inflation prints before that meeting. 

Previewing the UK inflation data, analysts at TD Securities (TDS) noted: “Headline inflation should fall to just a touch above the 2% target in April, largely on the back of another 13% decline in Ofgem's energy price cap. Base effects in core goods should help core to fall to 3.6% y/y (mkt: 3.6%).”

“On services, we see sticky momentum, partly in hotels and airfares, keeping the y/y rate 0.1 ppts above the BoE's forecast,” the TDS analysts said.

When will the UK Consumer Price Index report be released and how could it affect GBP/USD?

The CPI data will highlight the UK calendar on Wednesday at 06:00 GMT. The Pound Sterling is battling the 1.2700 round level against the US Dollar in the lead-up to the inflation release. Meanwhile, the US Dollar Index is holding its recovery momentum on waning expectations of aggressive interest rate cuts by the US Federal Reserve (Fed).

A hotter-than-expected headline and core inflation data could pour cold water on market expectations of a June BoE rate cut, providing a fresh lift to the Pound Sterling. In such a case, GBP/USD could unleash additional recovery toward the 1.2800 level. On the other hand, GBP/USD could retest the 1.2600 demand area if significantly softer UK CPI readings affirm BoE rate cut bets for next month.

Dhwani Mehta, Asian Session Lead Analyst at FXStreet, offers a brief technical outlook for the major and explains: “GBP/USD’s daily chart portrays a bullish crossover of the 21-day Simple Moving Average (SMA) and the 200-day SMA, suggesting a constructive outlook for the pair in the near term. The 14-day Relative Strength Index (RSI) points north above the midline, near 67.0, justifying the bullish potential in the Pound Sterling.”

Dhwani adds: “The pair need to take out the March 21 high of 1.2804 to sustain the recovery momentum. The upside targets are seen at the 1.2850 psychological level and the March 8 high of 1.2894. On the other hand, the immediate support is placed at 1.2633, the 100-day SMA, below which the 1.2585-1.2565 demand area could be tested. The last line of defense for buyers is seen at the 200-day SMA at 1.2540.” Dhwani adds.