GBP/USD – UK inflation data offers hope for the Bank of England

• UK CPI falls to 7.9% from 8.7%, core CPI 6.9% from 7.1%
• BoE base rate now seen peaking at 5.75% according to markets
• GBPUSD slips below 1.30 after the data

It’s been a long time coming but inflation in the UK is finally on the decline and in a rare show of good news, it’s falling at a faster pace than expected on both the headline and core levels.

We haven’t been treated to many reports like this over the last couple of years, and even when we have any enthusiasm has quickly been extinguished. But this feels different. Without wanting to fall victim to the “this time it’s different” mantra that often precedes a terrible turn of events, there is something more promising about this shift.

It follows similar declines in the US and the eurozone in recent months, both of which were sharper than expected and at the headline and core level. Unless this is a blip across the board, which is possible, it may be a sign that inflation is on a path to more modest and sustainable levels.

Of course, there’s still an awfully long way to go and the central bank is not going to declare victory on the back of one release. But those wild interest rate forecasts of 6.5%+ that we’ve been seeing may start to be pared back, perhaps quite significantly as it becomes clear that favourable base effects combined with lower energy and food inflation and the impact of past hikes start to have a substantial impact on the data.

The pound has fallen quite heavily on the back of the release which probably reflects those expectations now being pared back. I don’t want to get too carried away but peak rate expectations may now be behind us which could make for a more hopeful second half of the year.

I say I don’t want to get carried away but then, upon seeing the release, I was immediately reminded of the famous Office US “It’s happening!” scene that is so often widely circulated on social media so perhaps I also, in the words of Michael Scott, need to stay calm.

Sterling slides after the CPI release

The pound came under pressure after the data as UK yields dived and BoE interest rate expectations were pared back.

GBPUSD Daily

Source – OANDA on Trading View

It broke back below 1.30 against the dollar only a few days after moving above here for the first time since April last year. This highlights just how much of a surprise today’s data was given how disappointing it’s been for many months now.

With the price now trending lower, the levels below that stand out as potential support are 1.2866 – 50 fib – and, possibly to a greater extent 1.28 – 61.8 fib.

In reality, the area between the two will be most interesting as it also falls around the highs from last month and could also potentially roughly coincide with a test of the rising trend line. A move below here could suggest the recovery rally in cable may have peaked for now.

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