Sterling rises as UK CPI interacts ahead of BoE decision

As expected, UK inflation continues to fall following the release of economic data on Wednesday. This data pushed the pound sterling above 1.2700. However, steady growth in the UK services sector may lead the Bank of England to hold interest rates steady at its meeting today, June 20.

Disappointing retail sales data weighed on the US dollar, preventing gains. Meanwhile, in Britain, the UK Office for National Statistics confirmed that inflation fell in May as anticipated, propelling the pound above the 1.2700 level. UK inflation dropped to the central bank’s target of 2% in May, the first time in three years, according to data released Wednesday. This marks a decline from 2.3% in April. The easing of pandemic restrictions and the war in Ukraine appear to have had a limited impact on inflation. Core CPI, excluding volatile items like food and energy, also fell, dropping from 3.9% to 3.5%.

Despite overall inflation dropping to 2%, inflation in the services sector remains stubbornly high at 5.7%. This is above expectations of 5.5% and significantly exceeds the Bank of England’s target, likely preventing policymakers from considering interest rate cuts in the near future.

Bank of England Decision Forecast

Despite some speculation about a potential cut, the majority of observers anticipate no change in policy until later this year, with the upcoming elections likely playing a more significant role in future market movements.

UK services inflation remained stubbornly high in May, at 5.9% year-on-year, down slightly from 6.0%. This resilience contributed to the pound sterling’s appreciation against the US dollar. Meanwhile, the US dollar found support after a dip caused by weaker-than-expected May retail sales data in the US.

Disappointing Retail Sales Data Weakens Dollar

Retail sales data has put the US dollar on its back, leading financial markets to anticipate an earlier interest rate cut by the Federal Reserve. The US Dollar Index (DXY) retreated from a new six-week high of 105.80, though it remains above the key support level of 105.00.

Sales Growth Falls Short of Expectations

While April retail sales initially showed no change and were later revised down to a 0.2% decline, May saw a meager 0.1% increase, falling short of the expected 0.2% growth. Core retail sales, excluding volatile auto sales, also dropped by 0.2%. This weak performance raises concerns about a potential slowdown in economic growth (GDP) for the second quarter, as core retail sales are a key indicator of consumer spending, a major contributor to GDP.

Investors have witnessed a decline in footfall at food and beverage service outlets, lower ticket sizes at service stations as a result of fluctuations in car and gasoline prices, and weak demand for building supplies. This implies that families are reducing their spending and restricting themselves to spending on non-essential items, which is… Usually as a result of weak purchasing power due to high interest rates and inflation.

The 30-day Federal Reserve funds futures pricing data, as reported in the CME FedWatch tool, indicates two rate cuts this year compared to the cut that Fed policymakers indicated in their latest interest rate estimates and forecasts early this June. Because of the May US inflation report, which indicated a resumption of lower inflation, investors expect the Fed to cut interest rates twice this year.

Lori Logan, a senior Fed official and head of the Dallas Fed, said on Tuesday that it was encouraging to see the latest inflation data pointing to a slowdown in price pressures. However, before considering cutting rates, monetary policy officials need to see more It is strong evidence that inflation is declining in a sustainable manner.