GBP/USD: GROWTH CONCERNS WILL TEMPER POUND GAINS – MUFG

We have just had the release of the May CPI report in the UK and once again it is a bad report. Economists at MUFG Bank analyze the implication of the latest inflation data ahead of the Bank of England (BoE) meeting tomorrow.

Another UK CPI upside surprise points to a possible 50 bps hike by BoE

MoM gain in CPI of 0.7% was bigger than the 0.4% expected. As a  result, the annual rate remained unchanged at 8.7% instead of declining to 8.4% as expected. Worse still, it is underlying inflation pressures causing the upside surprise with the core CPI YoY rate accelerating from 6.8% to 7.1%, a new cyclical high.

Our call for tomorrow was 25 bps but we lean slightly more in favour of 50 bps now given this terrible inflation print. 

Like before, more aggressive action should help boost GBP near-term but investor concerns will likely build over the growth implications which will limit the scale of appreciation at higher levels, possibly approaching the 1.3000-level in GBP/USD. But we are already on the fine line of high inflation/BoE policy action lifting GBP and high inflation/perceived BoE policy mismanagement undermining the Pound.