Forex markets were excited about the prospects of lower inflation, which strengthened the case for interest rate cuts. The UK released its latest economic report, which was positive. According to the Office for National Statistics, May inflation fell to the Bank of England’s 2% target for the first time in nearly three years.
Lowering inflation pressure is welcome news for markets, consumers, and the UK central bank. First, it provides much-needed relief to households after more than a year of high inflation. Second, it sets the stage for the Bank of England’s anticipated interest rate cut campaign, where borrowing costs are expected to decrease gradually, boosting the economy.
Data released on Wednesday showed the UK Consumer Price Index (CPI) rose by 2% annually in the 12 months to May 2024, down from 2.3% in April. This indicates that prices are still rising but at the slowest rate since July 2021. This follows a period of high inflation in the UK, which peaked at 11.1% in October 2022 – the highest level since 1981.
Food prices, which continued to drop last month, were among the biggest factors in reducing inflation. However, core inflation remained high at 3.5%, down from 3.9% in April. This rate measures prices excluding more volatile items such as alcohol, energy, and food.
After the latest economic report was released, the GBPUSD pair rose by 0.1%, reaching $1.2730 after opening the trading session at $1.2700.
Despite the recent drop in inflation, people expect the BoE to maintain current interest rates at its upcoming meeting on Thursday. However, there is growing speculation that a rate cut could be coming soon, potentially as early as August, if the trend of slowing inflation continues.
In contrast, the Bank of Japan’s decision to leave its benchmark interest rate unchanged at 0.1% pushed yen buyers away. Traders had expected news of more rate hikes to pull the yen out of its slump. Following this news, the dollar gained early today to cross the ¥158.00 mark, and Japan's silence isn’t helping its currency’s prospects.
As global markets continue to respond to these developments, the differing approaches of central banks highlight the complexities and challenges of managing economic policy in today's environment.
