UK CPI preview: Surging UK inflation to strengthen the pound?

The pound may receive a boost this week, following the publication of the UK’s latest consumer price index on Wednesday. April’s inflation figures will be closely watched by GBP investors as they seek to price in future interest rate cuts from the Bank of England (BoE).

The CPI figures may help to build on Sterling’s recent strength, with GBP/USD having struck a two-week high and GBP/EUR hovering close to a five-week high, following the announcement of a UK-EU trade reset on Monday.

What is expected to happen with UK inflation?

Economists expect April’s CPI figures to report a sharp acceleration in UK inflation after the UK energy cap was raised.

Consensus estimates predict inflation will accelerate from 2.6% to 3.3%, propelling it above the BoE’s 2-3% target range.

Core inflation, which excludes energy and food prices from its calculations, is also expected to rise from 3.4% to 3.7%.

How might this influence BoE rate cut bets and the pound?

A rise in inflation could see GBP investors trim their bets on interest rate cuts from the BoE, boosting the pound, particularly in the wake of last week’s stronger-than-expected GDP figures.

On the other hand, such a sharp jump in inflation could spark concerns over the UK’s wider macroeconomic outlook and ultimately limit Sterling’s upside potential.

In the meantime, the fallout from Moody’s decision to strip the US of its triple-A credit rating is still reverberating through markets today, and this could see the US dollar test new multi-week lows amid lingering fears of a USD crisis.

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