GBP/USD rises as surging inflation puts pressure on the BOE

The GBP/USD pair popped on Wednesday after the latest UK inflation data. The pair rose to 1.4110, which was substantially higher than this week’s low of 1.4033. 

UK inflation rises

Consumer prices are rising around the world as the economy recovers and commodity prices rise. This trend continued in the UK. 

According to the Office of National Statistics (ONS), the headline consumer price index (CPI) rose by 0.6% in May, better than the expected slowdown of 0.3%. This increase led to a year-on-year increase of 2.1% after rising by 1.5% in the previous month. This increase was above the Bank of England’s (BOE) target of 2% and the median estimate of 1.8%.

The core CPI, which excludes the volatile food and energy prices, rose from 0.3% to 0.8% on a month-on-month basis and from 1.3% to 2.0% on an annualised basis. This increase was mostly because of a sharp increase of clothing, motor fuel, and recreational goods prices. It as partially offset by falling food and non-alcoholic prices.

The GBP/USD also rose after the release of factory-gate prices. The PPI input increased from 10% to 10.7% while PI output rose from 4.0% to 4.6%. As such, these numbers show that there is a sizablegap between producer and consumer prices.

The data came a day after the UK published strong unemployment numbers. The unemployment rate declined from 4.8% in March to 4.7% in April. Therefore, these numbers point to possible tightening by the Bank of England (BOE) when it meets next week. In a note, analysts at ING wrote:

“For the time being, we’re still penciling in the first rate hike in early 2023. However a more rapid economic recovery – perhaps triggered by greater-than-expected unloading of household savings – could conceivably bring that forward in 2022”

The GBP/USD will later today react to the latest Federal Reserve interest rate decision that will come out later today. Analysts expect the Fed will leave rates unchanged and maintain a hawkish tone.

GBP/USD analysis

The four-hour chart shows that the GBP/USD pair jumped after the latest UK inflation data. The pair has moved above the important resistance at 1.4084 and crossed the 25-day exponential moving averages (EMA). At the same time, the Relative Strength Index (RSI) has formed a falling channel that is shown in blue. This is a sign of a bearish divergence. Therefore, the pair may resume the downward trend as bears target the next key support at 1.4000.