UK June CPI Preview: Hot inflation likely to support another Sterling rally

• The Office for National Statistics is due to publish the UK inflation data on Wednesday.
• Core annual inflation is seen sticky at 7.1%, headline figure set to fall further.
• The UK CPI data could cement a 50 bps BoE August rate hike and fuel a Pound Sterling rally.

The all-important Consumer Price Index (CPI) data from the United Kingdom (UK) will be published on Wednesday, July 19. Amid mounting wage and inflationary pressures in the UK, the country’s CPI release is likely to significantly impact the Bank of England (BoE) rate hike outlook, in turn, influencing the near-term direction in the GBP/USD pair.

After presenting the central bank’s half-yearly Financial Stability Report last Wednesday, BoE Governor Andrew Bailey said that "the UK economy and financial system has so far been resilient to interest rate risk." Bailey repeated his view that the current rate of pay growth was not consistent with the BoE's 2% inflation target. His comments came after the UK labor market report showed that the Unemployment Rate ticked higher to 4.0% in three months to May while the wage growth hit a record high of 7.3% 3M YoY to May. 

Hot wage inflation data strengthened the case for aggressive tightening by the BoE in the upcoming months, with the peak rate seen near 6.25%. That said, all eyes now remain on the June UK inflation report, which could cement expectations of a 50 basis points (bps) rate increase by the Bank of England next month.

What to expect in the next UK inflation report?

Economists are expecting the headline annual UK Consumer Price Index inflation to fall to 8.2% in June, compared with the 8.7% print reported in May. The Core CPI is expected to rise 7.1% YoY in June, at the same pace seen in May. On a monthly basis, Britain’s CPI inflation is likely to increase 0.4% in June, slowing from a 0.7% growth booked in May.

Analysts at BBH noted, “UK data highlight will be June CPI Wednesday. Headline is expected at 8.2% y/y vs. 8.7% in May, core is expected to remain steady at 7.1% y/y, and CPIH is expected at 7.5% y/y vs. 7.9% in May. If so, the headline would be the lowest since March 2022 but still well above the 2% target.”

“WIRP suggests another 50 bp hike is largely priced August 3, followed by 25 bp hikes September 21, November 2, and December 14 that would see the bank rate peak near 6.25%,” the analysts added.

When will the UK Consumer Price Index report be released and how could it affect GBP/USD?

The UK CPI data will be released at 06:00 GMT this Wednesday. Heading into the highly-anticipated inflation release from the United Kingdom, the Pound Sterling (GBP) is struggling below the 1.3100 round level against the US Dollar, holding its corrective mode after setting 15-month highs at 1.3146 last Friday. Increased bets for aggressive BoE tightening as against the dovish Fed interest rates outlook are likely to keep the correction limited in the GBP/USD pair.

The hotter-than-expected headline and core inflation data are likely to trigger a fresh upswing in the Pound Sterling, lifting the odds for a 50 bps rate hike by the BoE in August. GBP/USD could resume its uptrend toward 1.3200.  Alternatively, should the core inflation data miss market expectations, GBP/USD will likely extend its correction toward the 1.2850 key support.

Meanwhile, Dhwani Mehta, Asian Session Lead Analyst at FXStreet, offers a brief technical outlook for the major and explains: “The 14-day Relative Strength Index (RSI) has moved out of the overbought territory, suggesting that a fresh uptrend in the GBP/USD pair could be in the offing. Therefore, the UK inflation data holds the key for the near-term direction in the currency pair.

Dhwani also outlines important technical levels to trade the GBP/USD pair: “The major needs acceptance above the 1.3100 level to resume the previous uptrend. The next relevant hurdle for Pound Sterling buyers is seen at the multi-month high of 1.3146. On the downside, immediate support awaits at the 1.3000 round level, below which sellers could target the July 13 low at 1.2984. The additional correction will expose the 1.2950 psychological level.”