FxPro Market Commentary: UK Inflation Dampens Rate Cut Expectations
The UK's inflation rate exceeded expectations, causing traders and investors to be cautious about the prospects of policy easing in the coming months.
FxPro senior analyst Alex Kuptsikevich noted that consumer prices increased by 0.3% month-on-month, compared to an expected 0.2%. Annual inflation dropped from 3.2% in March to 2.3% in April, the lowest level in two years and close to the Bank of England's target but higher than the expected 2.3%.
Over the past 12 months, the core inflation rate has been slowly decreasing, but it has only dropped from a peak annual rate of 7.1% year-on-year to 3.9%. This progress is significant but falls far short of the desired level. We believe that the high growth rate of the core price index is the most crucial factor delaying policy easing.
Meanwhile, producer prices have been comfortably low for a prolonged period. The Producer Price Index (PPI) fell 1.5% year-on-year, remaining in negative territory for the past 11 months. The Output Price Index rose 1.1% year-on-year, quickly increasing from a February low of -0.2% in the last three months. Nevertheless, this is a relatively low rate and does not hinder policy easing.
Thus, the strongest inflationary pressure is concentrated on retailers. This may result from rising labor costs or attempts to compensate for thin profits from previous years.
Persistent inflation translates into tight monetary policy, putting pressure on the UK stock market. The FTSE 100 index dropped by about 0.75%, forming a peak in the previous week. The inflation data seems to have provided a solid reason for a correction, and before we see buying activity, the index might fall from the current 8360 points to 8200 or even 8000 points.
Meanwhile, this is good news for the pound, which hit a new two-month high against the dollar, breaking through 1.2750 shortly after the data release. This is a significant resistance level over the past 11 months. If inflation remains higher than other G10 currencies, it could push GBP/USD to the 1.30-1.40 range. If the economy falters along with inflation issues, this will resolve monetary policy discrepancies and put renewed pressure on the pound, keeping it in the 1.20-1.27 range.
