On Wednesday (May 22), the UK CPI data released today rose 2.3% year on year, lower than the March inflation rate, but higher than economists' expectations. After the data was released, the pound strengthened and the pound rose against the US dollar.

Interest rate cuts fell short due to overheating inflation in April

The release of the UK's April inflation data became a stumbling block on the way for the Bank of England (BoE) to cut interest rates. The increase in the annual CPI rate marks the beginning of a renewed acceleration of inflationary pressure, forcing the Bank of England to implement austerity policies.

Until April 2024, it is hoped that lower overall inflation will have a cooling effect on service sector inflation. This proved not to be the case. Monthly and annual inflation indicators for the service sector not only exceeded average estimates, but also exceeded the maximum estimates in forecast data.

The overall CPI was higher than expected, but significant progress was made in the overall decline in inflation. The core CPI (YoY) also declined, but the magnitude was not as good as the overall indicator, falling from 4.2% to 3.9% (3.6% expected).

Paul Dales, chief British economist at KITU Macro, said that since inflation is easing less quickly than expected, the possibility that the UK will cut interest rates may be gradually disappearing. What is even more disappointing is that service inflation has declined only slightly, which is a key concern of Bank of England policymakers. He said that this “made it unlikely that interest rates would be cut in June, and it also raised some doubts about the August interest rate cut.”

The April UK inflation data had a significant impact on interest rate cut bets and the pound. Yesterday afternoon, the market expected the possibility that the Bank of England would cut interest rates for the first time in June was slightly more than 50%. Today, that ratio has dropped to a low of 14%, and interest rate cuts have been postponed from August to November. Furthermore, expectations of cutting interest rates twice this year have fallen back to only one, and it is possible that interest rates will be cut again.

The pound strengthened against the US dollar after the release of the UK CPI data

(GBP/USD daily trend chart source: eHuitong)

Affected by CPI data, the pound rose against the US dollar and traded above the previous volatile high of 1.2736 (November 2023), but as the dust settled, the exchange rate fell back below that high.

Prior to the data release, GBP/USD showed signs of bullish fatigue as the daily trading range became more pronounced and the daily trading range contracted before the 1.2736 level. However, the unexpected data provided a bullish catalyst to push the pair higher.

1.2800 will be the next resistance level, and 1.2585 near the 50-day simple moving average (SMA) will be the next support level. In terms of relative strength indicators, the pair is now dangerously close to the overbought region, which means that the resulting momentum needs to be closely watched to prevent the risk of a pullback.

(EUR/GBP daily trend chart source: eHuitong)

EUR/GBP is still worth watching until the ECB's June meeting

Higher UK CPI data drove the pair lower, and it turns out that trend line support is not a problem. EUR/GBP closed slightly below the supporting trend line yesterday, but has easily broken through the trend line so far today. The most pressing support level is 0.8515, which is the level that will support the pair in July and August 2023 and most of 2024. In the case of an immediate pullback, the previous trend line support becomes trend line resistance.

At 17:33 Beijing time, GBP/USD was reported at 1.2724, an increase of 0.13%. EUR/GBP reported 0.8521/22, a decrease of 0.21%.