GBP/USD shrugs as UK inflation higher than expected

The British pound edged higher earlier today but has pared most of those gains. GBP/USD is trading at 1.2703, up 0.06% early in the North American session.

UK inflation declines less than expected

UK inflation fell sharply in April, falling to 2.3% y/y. This was down from 3.2% in March and the lowest rate since July 2021 but higher than the market estimate of 2.1%. On a monthly basis, inflation dropped to 0.3%, down from 0.6% in March and just above the market estimate of 0.2%. Food prices fell while higher gasoline prices and services inflation contributed to upward pressure on CPI.

Core CPI eased to 3.9% y/y, down from 4.2% in March but above the market estimate of 3.6%. The monthly reading surprised with a 0.9% gain, higher than the March gain of 0.6% and above the market estimate of 0.7%.GBP

The inflation report was on the whole positive but the rise in April core CPI left investors with a sour taste and dampened expectations for rate cut in June. The money markets have lowered pricing of a June rate cut to just 18%, compared to 50% on Tuesday.

The Bank of England has made inflation its number one priority and can point to an inflation rate that is closing in on the 2% target, after hitting a high of 11.2% in October 2022. The private sector is groaning under the weight of interest rates at 5.25% and the BOE has signaled that a rate hike is a possibility this summer but may have to delay an initial rate cut to August, as inflation remains sticky.

In the US, we’ll get a look at the FOMC minutes of the meeting earlier this month. The minutes may provide insight into the mood of FOMC members. Based on the message that the Fed has been steadily feeding the markets, the minutes will likely be hawkish. The markets have priced in a rate hike in September but Fed members have pointed to high inflation as a reason to maintain rates in restrictive territory until there is clear evidence that inflation will remain sustainable around the 2% target.

GBP/USD Technical

• There is support at 1.2641 and 1.2570
• 1.2772 and 1.2843 are the next resistance lines

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