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The Bank of England and the UK government breathed a big sigh of relief this morning as UK CPI surprised to the downside ending a four-month period for price growth that exceeded forecasts.

Annual inflation eased to 7.9% in June, down from 8.7% in May and lower than the estimates of 8.2%.

Much of this was due to petrol prices which fell by 2.6%, a major difference to the same period last year which saw a near-10% spike amid the fallout from the Ukraine conflict. Food price increases are also now slowing with the monthly 0.4% gain the slowest since early 2022.

Crucially, core inflation which strips out bumpy food and energy costs, slid to 6.9% from a 31-year high of 7.1% in the prior month.

Under the hood, policymakers on the MPC look closely at services inflation as this is less volatile than energy and food costs and can show more persistent price trends over a longer timeframe. This may now have peaked at 7.4% in May as the June print declined to 7.2%.
 

What does this mean for the BoE?

While all certainly good news, high wage growth is still very apparent and inflation remains some way above the BoE’s 2% target.

This all means another rate hike is anticipated at the BoE meeting at the start of August, though expectations for a 50bp move have diminished after this data release with around 36bp now priced in.

How was GBPUSD reacted?

GBP has inevitably turned sharply lower against the US dollar since the surprise report and breaking down through 1.30.

The June highs should offer strong support around 1.284, with the 21-day simple moving average (SMA) residing just some 20 pips south.

Stronger support may arrive at the 1.276 Fibonacci level.

However, if the US Dollar moves another leg lower, especially if the Fed next week confirms with one final 25-bps hike that peak US rates has been reached, that may help restore GBPUSD back above the psychologically-important 1.3000 mark.

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