UK CPI preview: Higher inflation may provide a selling opportunity on GBP/USD
|- UK inflation has probably picked up in April, rising above 2%.
- With rises in both headline and core inflation, the chances of a rate hike may rise.
- Nevertheless, Brexit looms above everything and the trend is to the downside.
The Bank of England sees rising inflation and will raise interest rates to stay ahead of the curve and prevent inflation from overheating, consequently pushing the pound higher. That is the theory, and it is partially correct. The BOE´s latest projections consist of gradual rate hikes and prices rising at a quicker pace.
Inflation is indeed, expected to rise. According to the economic calendar, the headline consumer price index is expected to advance from 1.9% year over year in March to 2.2% in April, crossing above the central bank's target of 2%. Core inflation is also set to accelerate, from 1.8% to 1.9% this month.
If the data comes out as expected, an increase raises the chance of the BOE raising rates later this year. And if they exceed expectations, the odds are even higher.
In these cases, GBP/USD has room to rise with speculation on higher rates. However, such an advance will likely be short-lived. The reason is Brexit. It is unclear what kind of exit the UK will opt for: a smooth one or a disruptive, no-deal one. The answer partially hinges on the leader that will replace Theresa May as PM, and also on the situation in parliament, the willingness of European partners to renegotiate after the European Parliament elections and many other factors.
At the moment, markets are bracing themselves for euro-skeptic Boris Johnson as the next PM and a hard Brexit. While the political landscape may change quickly, no substantial change is due before elections results are known on Sunday night.
So, in case the pound edges up in reaction to higher inflation, it may serve as a selling opportunity on GBP/USD. A rise related to inflation may make way to a fall back to Brexit reality.
In case UK prices accelerate but fall short of expectations, or in the less likely case that inflation stagnates or declines, there is more room to the downside. The disappointing data will go with the trend, in this case, exacerbating the situation.
All in all, the strong downtrend, driven by politics, is unlikely to abate soon, meaning every upside in the pound, even coming from a top-tier economic indicator, may be short-lived and could only serve as a selling opportunity.
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