Morning Brief – UK Data Check

Charles Porter
Tue 18 Jul 2023

UK Data Check

Tomorrow morning, ahead of market open, UK inflation data will provide in the latest meaningful metric for which to adjust GBP forecasts. We have seen inflation data remain stubbornly high in the UK recently, at a time when inflation rates are beginning to falter in other geographies. Tomorrow’s reading may therefore hold the key to understanding whether the UK must stick to its revamped and vigorous hiking cycle or not. With only proxies for inflation itself having been read in recent weeks, price level-influencing rather than price level data itself has been the driver of interest rate expectations and GBP in turn. Most notably, last week’s above-expectation wage inflation reading dragged both interest rate expectations and GBP spot prices higher. 

Tomorrow at 7am BST, UK inflation data will be released. Whilst public policy makers, businesses and the public alike may be focussed on the headline figure, many in the market believe the Bank of England will be watching the services inflation figure more closely. Services inflation often exhibits less volatility than goods-related inflation and will be a good indicator of whether survey data has been reliable. Despite wage expectations, recent survey data has been encouraging in the UK, showing that significantly less firms expect price hikes for their services and a fall in the cost of some pricey factors of service provision.

The market’s flirtation with the idea of a 50-basis point hike from the Bank of England in July since the release of wage inflation data last week could therefore be confirmed or denied by tomorrow’s data. GBP will be affected accordingly with rate expectations having been responsible in no small part for the current GBP strength. The headline figure is still expected to hold above 7% but any fall below that figure would have a significant impact upon GBP. If no progress at all is shown on lowering inflation, including the underlying services inflation highlighted above, rate expectations could build further to the benefit of GBP.

Discussion and Analysis by Charles Porter

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