PoundSterlingLIVE - Pound Sterling faces a key test in the form of the UK inflation release on Wednesday, June 21 as the figures will have a sizeable impact on the future of UK interest rate policy at the Bank of England which is set to deliver its next decision on Thursday.
The Bank of England is expected by markets to raise interest rates to as high as 6.0% in an effort to stave off inflation, in a move that has already brought misery for mortgage holders and could send the economy into recession.
Therefore, a downside miss would be welcomed by those looking for an easing back in Bank of England interest rate expectations, which would in turn bring UK bond yields lower.
But for those looking for a stronger British Pound, such a miss could spell an end to the recent uptrend, particularly if the Bank of England on Thursday delivers guidance suggesting a cooling in inflation data means it will not need to hike as far as 6.0%.
"The BoE meeting this Thursday is challenged by sticky inflation and strong wage growth, suggesting risks of a wage-price spiral. Wednesday’s May CPI will likely show a softening of the headline rate, but core inflation is expected to remain at 6.8% due to higher transportation costs," says David Alexander Meier, an analyst at Julius Baer Bank.
This will however be a complicated release as a stronger-than-expected release could also spell trouble: should we receive a second-consecutive upside blowout the Pound could come under pressure.
This is because the market would bet the UK has a unique inflation problem, which would see them push up Bank of England interest rate expectations yet further, heaping more pressure on borrowers and potentially lengthening and extending the length of any incoming recession.
This would potentially be unsupportive of Sterling.
Consensus expects the headline CPI figure from the ONS to be 0.5% month-on-month and 8.4% year-on-year, down from 1.2% and 8.7% respectively.
The all-important core CPI the market expects is 0.6% m/m for May, down from 1.3%, and 6.8% y/y, unchanged.
Ahead of the release the Pound to Euro exchange rate is quoted at 1.1690, the Pound to Dollar exchange rate at 1.2757.
"The pound sterling remains well supported by rising rates and we recently revised up our 3-month forecast to EUR/GBP 0.85," says Meier.
An original version of this article can be viewed at Pound Sterling Live
