GBP received a significant boost as the latest UK inflation data surpassed forecasts, tilting the odds in favour of an August interest rate reduction. Following the announcement that CPI inflation in the UK rose to 3.2% year-on-year in March, down from February's 3.4% but surpassing market expectations of 3.1%, the GBP/EUR exchange rate surged to 1.1735.
The crucial core CPI inflation rate, as reported by the ONS, increased by 4.2% year-on-year, a slight drop from 4.5%, yet still surpassing market forecasts of 4.1%. Meanwhile, services inflation saw a slight decrease from 6.1% to 6.0%. However, this level remains elevated, indicating that an immediate rate cut from the Bank of England (BoE) might not be on the horizon.
Markets leaned towards June as the kick-off for the rate-cutting cycle, but some members of the Bank's Monetary Policy Committee have recently indicated a preference for August. These latest figures will bolster this faction's position in forthcoming discussions.
Adding complexity for the BoE are forecasts suggesting that the Federal Reserve will likely only decrease interest rates once in 2024. Aligning with the Fed's actions is preferable for the Bank of England and other central banks to mitigate any possible currency devaluation. A decline in the GBP/USD exchange rate would escalate import expenses, which is particularly unwelcome amid ongoing escalations in global oil and gas prices.
What's crucial for GBP is how market expectations regarding the timing and scale of rate cuts develop. With Tuesday's wage data surpassing expectations and today's inflation surprise on the upside, the possibility of a rate cut in May is now unlikely.
