POUND STERLING CORRECTS AS INVESTORS AWAIT KEY BOE INTEREST RATE DECISION

Pound Sterling drops amid mixed responses to Bank of England’s interest rate decision.

Core inflation in the United Kingdom is moving in the wrong direction despite restrictive monetary policy.

UK households are going to face purchasing power constraints due to 8.7% inflation vs. 6% earnings rate.

The Pound Sterling (GBP) has posted a correction move after fresh hot United Kingdom inflation data baffled investors about the interest rate decision from the Bank of England (BoE), which will be announced at 11.00 GMT. The GBP/USD pair has faced moderate selling pressure even if investors are worried that a surprisingly higher Consumer Price Index (CPI) could force BoE policymakers to go extremely hawkish on interest rates, which could put economic prospects in danger.

United Kingdom’s inflation remained hotter than expected in May as labor market conditions have tightened further and food price inflation has not peaked yet. Meanwhile, UK’s core inflation has printed a fresh new high of 7.1%, which has tilted expectations of market participants in favor of a fat interest rate hike from the central bank.

Daily digest market movers: Pound Sterling restricts action ahead of Bank of England meeting

Pound Sterling witnessed a massive sell-off after UK’s May inflation data turned out to be more persistent.

UK inflation figures were surprisingly higher than expectations as monthly headline CPI for May expanded at a pace of 0.7%, matched April’s pace but remained higher than the estimated speed of 0.5%.

Annualized headline inflation remained steady at 8.7% while the market was anticipating a deceleration to 8.4%. While core UK CPI that excludes oil and food prices printed a fresh high of 7.1% versus expectations of steady performance.

UK households are going to face high pressure amid a wide deviation between 8.7% inflation and 6% earnings rate.

Hot inflation numbers seem uncomfortable for UK PM Rishi Sunak and BoE Governor Andrew Bailey as the former promised to halve inflation by year-end and investors believe that the latter is failing to do justice with his job of achieving price stability.

UK FM Jeremy Hunt is reluctant to cut taxes as it could propel already elevated inflationary pressures and would undermine the impact of hawkish monetary policy.

Investors are mixed about the interest rate policy as the latest inflation data has fueled chances of a fat interest rate hike while the other school of thought believes that a bulky rate hike would threaten the economic outlook.

A poll from Reuters shows that the BoE would raise interest rates by 25 bps to 4.75%. This will be the 13th time interest rate hike in a row, which would push rates to the highest since 2008.

Analysts at Rabobank expect another 25 bps hike that will lift the policy rate to 4.75%. This has been our forecast since October 2022. The upside risks to embedded inflation we flagged previously have materialized. We, therefore, add two more 25 bps hikes to our forecasts and now see rates reaching 5.25% this summer.

A pullback move in the US Dollar Index could be faded as Federal Reserve (Fed) policymakers delivered dovish commentary.

Atlanta Fed President Raphael Bostic cited that the central bank should not raise interest rates further or it would risk "needlessly" sapping the strength of the economy.

Chicago Fed Bank President Austan Goolsbee favored allowing current interest rates the required time to show their impact on the economy.

As per the CME Fedwatch tool, more than 70% chances are still in favor of a 25 bps interest rate hike in July to 5.25-5.50%.

Fed Chair Jerome Powell cited in his testimony at Congress that bringing down inflation to 2% has a long way to go.

Jerome Powell also confirmed that all policymakers have agreed that more rate hikes are required this year