UK Struggles with 30-Year High Core Inflation: Central Bank Eyeing 'Hard Landing'

This week was always about the UK, the Pound, and the struggling UK consumers. From the G7 group, the UK is the country struggling most with inflation, and economists are contemplating how high the central bank’s base rate may go. The UK inflation rate remained unchanged at 8.7% instead of declining to 8.4%. In addition, UK Core Inflation escalated unexpectedly to a 30-year high in May, reading 7.1%. The UK is now the only developed economy not to see inflation peak. So what does this mean for the UK economy and the Bank of England?

According to economists, the Bank of England may need to opt for a “hard landing” to bring inflation down. One of the reasons why UK inflation is harder to control is salary growth is 7% year-on-year. As a result, consumer demand is not yet under adequate pressure to bring down inflation. Bloomberg’s latest analysis is advising the Central Bank will increase interest rates by 75 basis points over the next two months. Therefore, the Bank of England will raise interest rates by 50 basis points at tomorrow’s meeting or next week. 

The more robust inflation data is affecting the British Pound and European indices. All major UK and European indices are declining during this morning’s European session. This includes the DAX, CAC, and the UK’s FTSE100. If the Federal Reserve remains hawkish this afternoon, the global stock market may remain under pressure. FedEx also released its earnings report earlier this morning. The quarterly report confirms a lower-than-expected revenue, which was 3% lower than expectations. FedEx’s Board of Directors also advised the global economy is likely to slow over the next 4-months. 

GBP/USD - UK Struggles with 30-Year High Inflation

This morning, the Pound/Dollar exchange rate is experiencing price movements in both directions as the Dollar is appreciating in value against the market. At the same time, the Pound is being supported by the UK’s latest inflation data and the possibility of a terminal rate as high as 6.00%. However, the Pound is also under pressure from the case of higher interest rates causing a recession. 

The UK debt to GDP figure rose to above 100% for the first time in over 60 years as the cost of debt increased due to the lower GDP figures. In addition, experts believe the average mortgage cost will increase above £3,000 over the next year. The higher debt cost is likely to pressure the Gross Domestic Product and consumer demand. The previous government opted to go against the Bank of England’s interest rate decisions. However, the current UK chancellor has confirmed the government will fully support further interest rate hikes, even if it is likely to tip the UK into a recession. Investors will also closely scrutinise the Governor’s press conference, where Mr. Bailey is expected to be questioned on the possibilities of 6.00% over the next six months.  

After the inflation data was announced, the exchange rate price initially increased. However, the Pound could not maintain momentum as the Dollar appreciated in value. The bullish price movement has fully corrected the day’s open price. Even though the fundamental elements point towards a bullish price movement, analysts will look for the cost to form a breakout at the 1.28065 level before speculating an increase. Currently, the price is trading below the 75-day moving average and at the 50.00 market of the RSI. As a result, technical analysis is not indicating a clear direction. But this will likely change if the price increases above 1.28065 or below 1.27460.

GBP/USD 1-Hour Chart on June 21st 

Investors will now monitor the exchange rate’s price action and the Federal Reserve’s testimony this afternoon. Investors will monitor if the regulator will likely hike a further 0.50% in the next 2–3 months. In addition, investors will also be following the US Dollar index to determine the overall performance of the Dollar and not solely against the Pound. However, they may now question if the Bank of England will hike 0.25% or 0.50%.

Summary:

• The UK inflation rate remained unchanged at 8.7% instead of declining to 8.4%. As a result, experts believe the central bank will push interest rates considerably higher. 
• UK Core Inflation escalated unexpectedly to a 30-year high in May, reading 7.1%. Will the BoE opt for a hard landing?
• The UK debt to GDP figure rose to above 100% for the first time in over 60 years as the cost of debt increased due to the lower GDP figures. 
• Investors will now monitor the exchange rate’s price action and the Federal Reserve’s testimony this afternoon. Investors will monitor if the regulator will likely hike a further 0.50% in the next 2–3 months.