One of the most hotly anticipated events for next week on May 24th will be the UK’s inflation data. At the last rate meeting the BoE hiked interest rates as expected, but It is only doing so to tackle very high inflation in the UK which is still in double digits. The upcoming release of UK inflation data holds significant importance as it will shape expectations for the Bank of England’s next interest rate increase. If inflation remains consistently high, it is likely to strengthen interest rate expectations, potentially leading to an increase in demand for GBP. Conversely, if inflation experiences a significant decline, it would likely dampen interest rate expectations, potentially encouraging the selling of the GBP.

What to look for?

Inflation is expected to fall sharply due to so-called ‘base effects’. Base effects refer to the impact of comparing current data to a previous period that had an unusually high or low value. It occurs when the comparison is influenced by a significant change in the underlying base or reference point. So, seeing as inflation really started to gain 12 months ago, the comparison now will show lower inflation increases. So, headline inflation should fall from the heady heights of double digits.

Inflation-Expectations-UK-19-05-23

However, the market will focus on what the inflation print is according to the market’s maximum and minimum expectations. So, if the headline and core inflation print both come in above the market’s maximum expectations, then expect the GBP to gain. In this case, at the time of writing, a potential EURGBP selling would be expected.

EURGBP-19-05-23

However, should the headline and core inflation print both come in below the market’s minimum expectations then the GBP can be expected to fall on relief that the BoE will not need to be so aggressive. In this case, investors will potentially look to pair the GBP against a weak currency.

UK inflation data is due out on Wednesday, May 24 at 07:00 UK time.