UK CPI inflation remains at BoE's 2.0% target in June

• United Kingdom annual CPI rose 2.0% in June vs. 2.0% forecast.
• British inflation eases to 0.1% MoM in June, meets estimates.
• GBP/USD rises toward 1.3000 after UK CPI inflation data.

The United Kingdom (UK) Consumer Price Index (CPI) rose 2.0% in the year to June, having increased by 2.0% in May, according to the data released by the Office for National Statistics (ONS) on Wednesday. 

The market consensus was for a 2.0% growth and the reading remained at the Bank of England’s (BoE) 2.0% target.

Core CPI (excluding volatile food and energy items) climbed 3.5% YoY in June, at the same pace as in May while matching the market forecast.

The UK June Services CPI inflation held steady at 5.7% YoY.

Meanwhile, the UK Consumer Price Index increased by 0.1% MoM in June, compared to a 0.3% acceleration in May and as expected 0.1%.

GBP/USD reaction to the UK CPI inflation data

The UK CPI data puts a fresh bid under the Pound Sterling, as the GBP/USD pair rises toward 1.3000. The pair is trading 0.08% higher on the day to trade near 1.2980, as of writing.

GBP/USD: 15-minutes chart

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This section below was published at 02:15 GMT as a preview of the UK Consumer Price Index (CPI) data.

• United Kingdom’s CPI report will be published by the Office for National Statistics on Wednesday.
• The annual UK headline and core inflation are expected to hold steady in June.
• The UK CPI data could revive BoE August interest rate cut bets, rocking the Pound Sterling.

The high-impact Consumer Price Index (CPI) data for June from the United Kingdom (UK) will be published by the Office for National Statistics (ONS) on Wednesday at 06:00 GMT.

The UK CPI inflation report could reinforce expectations of an interest-rate cut by the Bank of England (BoE) in August, with volatility set to spike around the Pound Sterling.

What to expect from the next UK inflation report?

The UK Consumer Price Index is expected to rise at an annual rate of 2.0% in June, at the same pace as in May, sitting at the BoE’s 2.0% target.

Core CPI inflation is likely to stay unchanged at 3.5% YoY in June. Meanwhile, the British monthly CPI is seen rising 0.1% in the same period, compared with the previous increase of 0.3%.

Official data is expected to show that services inflation ticked down to 5.6% in June from 5.7% the month before, according to a Bloomberg survey of economists.

Previewing the UK inflation data, TD Securities (TDS) analysts noted: “Heavy deflation in the energy component should keep headline inflation close to the 2% target in June despite core likely remaining sticky at 3.5% YoY.”

“Focus will continue to be on services, and here we see an unchanged YoY reading as momentum remains strong. Taylor Swift should not have that big of an impact on this print - August is the bigger risk in our view,” the TDS analysts said.

The encouraging UK growth numbers and BoE Chief Economist Huw Pill’s prudent comments last week helped push back against the timing of the BoE’s first rate cut since the COVID pandemic hit the world in 2020.

Data released by the ONS last Thursday showed that the UK economy grew by 0.4% in May, above the expected 0.2% monthly expansion, after stagnating in April.

Meanwhile, BoE Chief Economist Pill dampened expectations of an August interest rate cut on Wednesday. Pill said, "I think it's still an open question on whether the timing for a rate cut is now," adding that services inflation and wage growth showed "uncomfortable strength" despite headline inflation falling to the BoE's 2% target in May.

Money markets currently price in a 50% chance of 25 basis points (bps) cut to the Bank Rate on August 1, down from 62% seen early last week.

How will the UK Consumer Price Index report affect GBP/USD?

Against this backdrop, the UK CPI data will be crucial to determining whether the August rate reduction remains on the table for the BoE. An upside surprise to the headline and core inflation data could support the recent dialing down of expectations of a rate cut next month, fuelling a fresh leg higher in the Pound Sterling. In such a case, GBP/USD could unleash the additional upside toward the 1.3100 level.

On the other hand, GBP/USD could retest the 1.2800 round figure if the UK CPI readings meet forecasts while the services inflation softens significantly. This could bring back bets for the BoE policy pivot in August.

Dhwani Mehta, Asian Session Lead Analyst at FXStreet, offers a brief technical outlook for the major and explains: “GBP/USD’s daily chart portrays overbought conditions, as 14-day Relative Strength Index (RSI) holds near 75, signaling risks of a Pound Sterling correction in the near term.”

Dhwani adds: “The pair needs to find acceptance above the 1.3000 psychological level on a daily closing basis to extend the upside toward the July 19, 2023, high of 1.3045. On the flip side, the immediate support is placed at the March 8 high of 1.2894, below which the 1.2800 resistance-turned-support could be tested. The last line of defense for buyers is seen at the 21-day Simple Moving Average (SMA) at 1.2748.” Dhwani adds.