UK Inflation Preview: Too bad or too good figures to hit the pound

UK inflation has likely extended its fall to 0.5% yearly in May. The figures are set to move sterling, yet an increase depends on meeting expectations – not too hot nor too cold, FXStreet’s analyst Yohay Elam reports.

Key quotes

“The economic calendar is showing a potential drop from 0.8% in April to 0.5% in May. Such a drop would send inflation to the lowest since 2016 before sterling's post-referendum slump sent it back up. The BoE's target is 1-3% and it will likely miss it not only in April and May this year but for many months to come.”

“For the pound to rise, CPI would need to hit the sweet spot of between around 0.3% and 1% – showing that inflation is low and that more QE would help.” 

“If inflation surprises with over 1%, it could result in less stimulus from the BoE – perhaps under £100 billion in new funds, thus sending sterling down.”

“On the other extreme, CPI that is close to 0% – and especially negative CPI, deflation – would already raise the specter of negative rates, potentially punishing the pound.”