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The United Kingdom (UK) headline Consumer Price Index (CPI) rose 2.8% over the year in April, compared to a rise of 3.3% in March, the data released by the Office for National Statistics (ONS) showed on Wednesday. 

Markets predicted a 3.0% growth in the reported period. The UK inflation reading was well above the Bank of England’s (BoE) 2% inflation target.

The core CPI (excluding volatile food and energy items) climbed 2.5% year-over-year (YoY) in the same period, compared to March’s 3.1% print and came in softer than the forecast of 2.6%.

Meanwhile, the monthly UK CPI arrived at 0.7% in April versus a rise of 0.7% reported in March, below the market consensus of 0.9%.

GBP/USD reaction to the UK CPI inflation data

At the time of writing, the GBP/USD pair is trading 0.10% lower on the day to trade at 1.3381.

This section below was published at 05:25 GMT as a preview of the UK Consumer Price Index (CPI) inflation data.

• The annual UK headline inflation is seen easing in April despite an uptick in monthly inflation.
• The UK CPI data might provide some leeway for the BoE to keep interest rates unchanged in June.
• Bearish pressure on the Pound Sterling persists, and a higher-than-expected inflation reading could intensify it.

The United Kingdom (UK) Office for National Statistics (ONS) will publish the high-impact Consumer Price Index (CPI) data for March at 06:00 GMT. 

With inflation pressure high on the agenda of the central banks, April’s CPI will be analysed by the market from a monetary policy perspective, providing further insight about the Bank of England’s (BoE) next steps. In that sense, any relevant deviation from the market consensus is likely to boost near-term volatility for the British Pound (GBP). 

What to expect from the next UK inflation report?

The UK Consumer Price Index is expected to show that inflation softened to 3% year-over-year (YoY) in April, from the 3.3% level seen in March, although the monthly CPI growth is seen ticking up to 0.9% from 0.7% in the previous month. 

The Ofgem energy price cap, which was lowered ahead of the Iran war, seems to have cushioned the impact of the energy shock, while the unwinding of the Easter effect in prices has contributed to taming inflationary pressures.

The Core CPI, which excludes energy, food, alcohol, and tobacco prices, is expected to show that price growth from all other goods slowed down to 2.6% YoY in April, the coolest rate since July 2021, contributing to the softer CPI numbers.

Together with consumer Inflation, the Office for National Statistics will also release April’s Producer Price Index (PPI) figures, which are expected to follow suit. The PPI Input is forecast to slow down to 1% from 4.4% in March, while the PPI Output is seen ticking up to a 1% yearly rate, from 0.9% in March.

The cooling inflation, if confirmed, is likely to ease pressures on the BoE to hike interest rates immediately, which will be good news considering the increasing unemployment figures released on Tuesday. The trend, however, is unlikely to be long-lasting. Ofgem will revise the energy price cap in July, triggering a significant increase in energy bills, which is likely to be reflected in the headline CPI. The Bank of England expects consumer inflation to peak at 4% later this year.

“Though temporarily comforting, the brunt of the energy price shock will then be felt in Q3 with a potential for second-round effects in the latter half of the year,” said analysts at TD Securities.

How will the UK Consumer Price Index report affect GBP/USD?

Inflation is a key issue for the BoE’s monetary policy and, in that sense, tends to have a significant impact on the British Pound. The GBP, however, is suffering from weaknesses of its own in May, amid the growing political uncertainty after the Labour Party’s debacle in the local elections, and is likely to act as a headwind for bulls.

Bearing that in mind, a soft inflation reading might provide some support to the Pound, as it would give the BoE more time to await domestic developments and to better assess the impact of the Middle East conflict before taking any decision on interest rates. BoE Deputy Governor for Financial Stability, Sarah Breeden, warned on Monday that “political uncertainty is hitting the business environment” and advised the bank against being “trigger happy” on rates.

An upside surprise on inflation, on the contrary, would put the BoE in a challenging situation, and might increase bearish pressure on the Pound in this case.

From a technical perspective, Guillermo Alcala, FX Analyst at FXStreet, sees the Pound on the defensive after last week’s sell-off: “The GBP’s near-term bias remains bearish even after Monday’s bullish engulfing candle in the daily chart has eased negative pressure.  Bulls, however, seem to need additional impulse to break a previous support level at 1.3450 and shift the focus towards the mid-May highs in the 1.3530-1.3540 area.”

“On the downside, key support is at Monday’s lows at around 1.3305. A confirmation below that level would expose late March and early April highs in the area of 1.3175,”  adds Alcalá.

Commerzbank’s Thu Lan Nguyen notes that markets are shifting towards a scenario of a lasting inflation shock linked to the Middle East conflict, pushing US inflation expectations higher. She highlights the Dollar’s traditional support from the Federal Reserve’s proactive reputation but warns that real interest rates and relative inflation paths matter. Nguyen remains cautious on a strong Dollar appreciation given potential higher US inflation and a more dovish Fed.

Lingering energy shock supports Dollar cautiously

"The market is increasingly abandoning the hope that, with regard to the Middle East conflict, we are merely dealing with a short-lived inflation shock. This can be seen, for example, in longer-term inflation expectations – that is, those looking beyond a one-year horizon. In the US, for instance, these have been slowly but noticeably climbing since the end of April."

"My colleagues have also explained in recent days why the dollar is benefiting in this environment: namely the sharp rise in US interest-rate expectations. Indeed, the US Federal Reserve enjoys a reputation as an active central bank – one that reacts very early and sufficiently strongly to inflation risks – which is why the dollar tends to benefit in times of rising inflation. And memories of the last energy crisis in 2022 are still fresh: back then, the Fed raised its policy rate as early as March, whereas the ECB waited until July."

"However, I would be cautious about relying solely on the speed at which central banks react. At first glance, that may seem logical: where interest rates rise the fastest, the currency’s carry also increases the fastest. But the profitability of a currency depends not on the nominal interest rate, but on the real interest rate."

"For the time being, I would therefore be cautious about betting on a pronounced appreciation of the dollar - because of potential higher US inflation pressure, and because of the risk of a more dovish Fed."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)

• The British Pound come under pressure, following the UK inflation data release.
• The UK headline CPI growth cooled down at a faster pace of 2.8% YoY vs. 3% estimates.
• Investors await FOMC minutes, UK flash PMI and Retail Sales data.

The British Pound (GBP) drops against its major currency peers, sliding to near 1.3375, during the European trading session on Wednesday. The British currency comes under pressure, following the release of the United Kingdom (UK) Consumer Price Index (CPI) data for April, which showed that inflationary pressures cooled down at a faster-than-expected pace.

The Office for National Statistics (ONS) has shown that the headline CPI grew by 2.8% Year-on-Year (YoY), slower than 3% estimates and March’s reading of 3.3%. In the same period, the core inflation – which excludes volatile components such as food, energy, alcohol and tobacco – dropped to 2.5% from the previous reading of 3.1%, while it was expected to arrive at 2.6%. Month-on-month (MoM) headline CPI rose steadily by 0.7%, slower than 0.9% estimates.

Signs of cooling UK price pressures would force traders to raise bets supporting Bank of England (BoE) interest rate cut bets in the near term.

Investors brace for more volatility in the British Pound in the remaining week, as the preliminary S&P Global Purchasing Managers’ Index (PMI) data for May and the Retail Sales are scheduled to be published on Thursday and Friday, respectively.

Meanwhile, the US Dollar holds onto over-a-week long rally due to increasing expectations that the Federal Reserve (Fed) will deliver at least one interest rate hike this year. As of writing, the US Dollar Index (DXY), which gauges the Greenback’s value against six major currencies, trades 0.1% higher to near 99.40.

Hawkish Fed prospects have accelerated due to elevated oil prices amid restricted energy flows through the Strait of Hormuz.

For more cues on the US interest rate outlook, investors will focus on Federal Open Market Committee (FOMC) minutes of the April policy meeting, which will be published at 18:00 GMT.