GBP: Don’t take inflation spike – ING

UK inflation for April surprised on the hot side this morning, with service CPI spiking from 4.7% to 5.4% against expectations for 4.8%, ING’s FX analyst Francesco Pesole notes.

Break below 0.840 remains a tangible possibility

“A closer look at the data shows that most of the jump can be traced back to a spike in road tax, which had an outsized effect, along with higher airfares and package holiday prices, both of which were skewed by the timing of Easter and the specific measurement day in April. Meanwhile, key components like rents, catering, and medical care all saw their year-on-year inflation rates continue to ease.”

“So, there are reasons for the Bank of England to look past this hot CPI print. And while expectations for a June hold are all but cemented, it doesn’t look like enough to dismiss an August cut as the underlying services inflation trend is still improving when discounting tax-related distortions.”

“The pound is moderately stronger across the board following the CPI release. We have been subscribers of a bearish EUR/GBP stance of late and a more cautious Bank of Englang cutting cycle should keep the rate differential wide and favouring downside explorations in the pair. We think a break below 0.840 remains a tangible possibility in the coming weeks.”