The UK inflation report for May released this morning turned out to be a hawkish surprise. Headline CPI stayed unchanged at 8.7% YoY while the market expected a deceleration to 8.4% YoY. Moreover, core CPI was expected to stay unchanged at 6.8% YoY but instead accelerated to 7.1% YoY - the highest level in 30 years. GBP surged following the release with GBPUSD painted a daily high near the 1.28 mark and EURGBP painting a daily low in the 0.8525 area.
A higher-than-expected CPI reading, and especially failure of headline CPI to slow, saw hawkish BoE bets rise. Bank of England is set to announce its next monetary policy decision tomorrow at 12:00 pm BST. Economists expect that a 25 basis point rate hike will be delivered. Money markets currently price in a 72% chance of a 25 basis point rate hike and a 28% chance of a 50 basis point rate hike. However, it should be noted that markets almost fully price in 75 basis points of cumulative tightening over the next two meetings (tomorrow and August 3, 2023). This means that a 50 basis point rate hike is expected at one of those meetings and a hawkish CPI surprise today boost odds that 50 bp rate hike will be delivered tomorrow.
Taking a look at EURGBP chart at D1 interval, we can see that the pair has been trading lower since a downside breakout from the trading range in early-May. Pair dived this morning after release of hawkish UK CPI report but has recovered all of those losses since and now trades at daily highs. Two key levels to watch in near-term are 0.8500 support zone and 0.8600 resistance zone. However, we will likely have to wait until tomorrow's BoE decision and resulting volatility spike to see EURGBP testing either of these levels.
Source: xStation5
