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Inflation in the UK is expected to continue falling in the coming months as energy prices ease. Data published on Friday showed that UK’s inflation expectations dropped to the lowest level in 16 months. It dropped to a low of 3.6% from the previous 4.8%. Most importantly, data by the Bank of England (BOE) showed that expectations for 2024 and 2025 dropped to the lowest point in more than a year.
Bank of England decision ahead
UK’s inflation came a week before the Bank of England (BoE) is expected to meet and deliver its decision of the month. Analysts believe that these numbers will encourage the bank to maintain a dovish tone as it did in its February meeting.
As such, analysts are pricing in a situation where the BoE hikes by 0.25% and pushes rates to 4.25%. It will then hit a strategic pause as it assesses the impact of the recent hikes on inflation and the broad economy.
The meeting will also come a day after the UK publishes its inflation numbers. Economists polled by Reuters expect the data to show that the headline consumer price index (CPI) dropped from double digits to 9.9%. On a MoM basis, they expect that inflation dropped by -0.4% during the month.
Core CPI, on the other hand, is expected to come in at 6.2% on a YoY basis and at -0.5% on a MoM basis. If analysts are accurate, UK’s inflation has been in a downward trend in the past few months straight.
Impact on the GBP/USD and EUR/GBP
The GBP/USD pair reacted mildly to the latest UK inflation expectations data. It was trading at 1.2134, which was a few points below this week’s high of 1.2180. This price action is mostly because investors are still watching the developments in the banking sector.
Meanwhile, the EUR/GBP exchange rate drifted downwards after the economic data. It moved to a low of 0.8761, which was a few points below the weekly high of 0.8818. This happened after the EU published inflation data that showed that prices dropped slightly in February. As we wrote here, the biggest forex news of the week was the European Central Bank decision.
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