GBP: CPI Print Holds Key Risks for Sterling Amid Ultra-Hawkish BoE Expectations

GBP: CPI is a big risk event

Our team discussed here how the latest UK wage growth figures likely paved the way to a repeat 50bp hike by the Bank of England in August. The faster-than-expected inflation deceleration in the US hit the pound in some non-dollar crosses, largely because of the vulnerability of the ultra-hawkish BoE market rate expectations.

Such vulnerability of the pound remains very much present now as markets continue to factor in 130bp of tightening to a peak in the UK, leaving ample room for dovish repricings. This week’s UK CPI print is thus a major risk event for sterling since signs of deceleration in price pressure would likely nudge the dial in favour of 25bp over a half-point hike in August. Markets currently price in 45bp for August, so the downside risks likely exceed the upside for the pound.