UK Core Inflation Breaches 7% as Headline Beats Estimates, GBP/USD Bid

UK INFLATION KEY POINTS:

READ MORE: BoE Preview: Inflation Demands More Hiking Despite Mortgage Pain

The core inflation rate in the UK is estimated to have risen to 7.1% in the 12 months to May 2023, up from 6.8% in April, and the highest rate since March 1992 ahead of the Bank of England meeting.

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The YoY inflation rate held steady at 8.7% coming in above estimates of around 8.4% and remains at a 13-month low. This may sound rosy however, the print no doubt remains extremely high and at levels that will no doubt continue to concern the BoE. Rising prices for air travel, recreational and cultural goods and services, and second-hand cars were enough offset slowing food inflation and falling prices for motor fuel. The data is likely is likely to place additional pressure om BoE policymakers heading into tomorrow’s meeting.

Source: ONS

Food price inflation meanwhile remains another area of concern with a small drop in the month of overall but the YoY rate far exceeding the headline inflation number. Fuel prices led to the largest downward contribution to monthly inflation in May, falling 13.1 YoY compared to the 8.9% in April. The inflation rate for UK goods eased a little in May don to 9.7% but another concern lies in service sector inflation which accelerated to 7.4%. This could pose a further risk to the fight against inflation as the UK heads into a busy summer period which could keep service inflation on the rise.

IMPLICATION FOR THE BANK OF ENGLAND (BoE) MOVING FORWARD

The Bank of England’s (BoE) faces more challenges than most in navigating its way through the current economic climate. This weeks BoE meeting will hold particular significance as markets have already heard from both the ECB and the Federal Reserve on their projections for the second half of 2023.

Inflation in the UK continues to be a hotly debated topic with rising mortgage payments being one of the key issues. Yesterday saw the mortgage issue discussed in the House of Commons with UK Chancellor Jeremy Hunt quick to stress that any further Government intervention could lead to further inflationary pressure. The Chancellor urged stretched consumers to look at the Government support measures which are already in place.

The continued repricing of the peak rate for the Bank of England has remained another area of contention with current market estimates resting around 5.75%. This would suggest a further 130bps of hikes which according to the Bank of England is extremely optimistic. The Core inflation print is likely to be a key factor for the BoE moving forward, particularly after the acceleration seen in today’s print. As I have discussed over the course of the year, the drop in inflation that many had hoped may materialize but it will be a bumpy road ahead. I still believe that a large chunk of inflation has been entrenched in markets and thus going forward we may see further signs of stickiness which would only serve to complicate matter further for the Bank of England (BoE). For a full PREVIEW and BREAKDOWN of the BoE meeting CLICK HERE.

MARKET REACTION

GBP/USD Daily Chart

Source: TradingView, prepared by Zain Vawda

GBPUSD saw an initial 50-pip spike higher toward the 1.2800 zone before paring gains to trade at 1.2770 at the time of writing. Bulls still remain in control following the fresh yearly high printed at the back end of last week. Immediate support rests around the 1.2680 area before the 1.2600 and 1.2500 areas come into focus, the latter of which lines up with the 50-day MA.

Looking at a continuation of the upside rally and the psychological 1.3000 level remains key with a break above likely eyeing the 1.3250 area.

Key Levels to Keep an Eye on:

Support Levels:

• 1.2680
• 1.2600
• 1.2510 (50-day MA)

Resistance Levels:

— Written by Zain Vawda for DailyFX.com

Contact and follow Zain on Twitter: @zvawda