Inflation Insights: Unraveling The Impact On GBP And Equity Markets!

Tomorrow morning, Great Britain awaits a key set of economic releases, including inflation data points, producer price index data points, and retail price index figures. Notably, consumer price inflation in the United Kingdom remained steady at 8.7 percent in May 2023, maintaining the previous month’s 13-month low but surpassing market expectations of 8.4 percent. This persistent high rate stands significantly above the Bank of England’s target of 2.0 percent, heightening concerns over its persistency and mounting pressure on policymakers to uphold the ongoing tightening campaign.

Despite falling fuel costs and easing food inflation, surging prices for air travel, recreational and cultural goods and services, and second-hand cars counterbalanced the declines. This resulted in a core inflation rate, excluding volatile items like energy, food, alcohol, and tobacco, reaching 7.1 percent, marking the highest level since March 1992.

Meanwhile, core producer prices in the UK grew 4.1 percent from the previous year in May 2023, below market forecasts of a 4.7 percent increase, indicating the lowest level since June 2021. Additionally, the Retail Price Index in the United Kingdom saw an 11.3 percent year-on-year increase in May 2023, the least in eleven months, yet slightly higher than predicted. On a monthly basis, the RPI rose by 0.7 percent, showing a slowdown from a 1.5 percent increase in April.

From a technical standpoint, the GBP/USD has experienced a strong rally against the USD in the past quarter, currently pulling back from the 100% extension and PP resistance level. If core inflation disappoints and falls below expectations, it may trigger a sell-off in the GBP/USD, signaling to the Bank of England that inflation is coming under control. This, in turn, could have a positive impact on the equity markets. As investors eagerly await the economic reports, the outcomes will undoubtedly influence market sentiments and direction.