Sterling Gains as April Inflation Exceeds Forecasts, Shifts BoE Rate Cut Hopes to November

GBP Gains as Inflation Exceeds Forecasts: The pound jumped after data showed UK inflation fell less than expected in April. The April print has emerged as a significant hurdle for the Bank of England’s potential rate cuts. Both monthly and yearly inflation measures exceeded the average estimate, contradicting expectations for lower headline inflation. Following the report, GBP/USD gained traction, reaching its highest level in two months near $1.2750.

UK Inflation Data: The Office for National Statistics reported that UK inflation, measured by the Consumer Price Index (CPI), declined to 2.3% on a yearly basis in April from 3.2% in March. This reading was above the market expectation of 2.1%. Core CPI, which excludes volatile food and energy prices, rose to 3.9% in the same period, exceeding analysts’ estimates of 3.6%.

UK Rate Cut Expectations Shift: Following the release of inflation figures for April, the probability of a June rate cut by the Bank of England fell from over 50% to a mere 14%. Expectations for the first-rate cut shifted from August to November. Additionally, the outlook for two rate cuts this year has retreated to the potential for just one.

Investors Await Fed Meeting Minutes: Investors anticipated the release of Federal Reserve meeting minutes for insights into the Fed’s rate path. Despite recent milder inflation readings, Fed officials remain cautious about rate cuts. Fed officials have indicated the need for several more months of favourable inflation data before supporting rate cuts.

Market Reactions to Federal Reserve Outlook: Markets have priced in about 40 basis points of easing from the Fed this year, down from 52 basis points last week. The upcoming Personal Consumption Expenditures (PCE) data on May 31^st will be crucial in shaping rate cut expectations.

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