The Pound Sterling exhibits a mixed performance against major currencies amid uncertainty ahead of the United Kingdom (UK) Consumer Price Index (CPI) data for May, which is scheduled for Wednesday. The inflation data will provide cues about when the Bank of England (BoE) will start reducing interest rates.
The UK CPI report is expected to show that the headline inflation has declined to BoE’s target of 2% from April’s reading of 2.3%. In the same period, the core CPI, which strips off volatile food and energy prices, is estimated to have decelerated to 3.5% from the former release of 3.9%. However, monthly headline inflation is expected to have grown at a higher pace of 0.4% from 0.3% in April.
Investors will pay close attention to the service inflation data, which has remained a key reason for a bumpier path of inflation toward the central bank’s 2% target. Inflation in the service sector, which is mainly driven by wage growth, could remain persistent as the Average Earnings data Excluding bonuses for three months ending April – a key measure to wage growth – grew steadily by 6.0%. The pace at which wages are growing is much higher than what is needed to bring core inflation down to 2%.
This week, the Pound Sterling is expected to remain highly volatile as the inflation data will be followed by the BoE’s interest rate policy decision, which will be announced on Thursday. The BoE is widely anticipated to keep interest rates unchanged at 5.25% for the seventh time in a row. Therefore, investors will look for cues about the future rate-cut timeframe. Currently, investors see a 57% chance of another BoE rate hold in August, Reuters reported.
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