This Week: GBPUSD awaits US CPI and Bank of England clues

It feels like big risk events are coming thick and fast in May.

The mid-week US inflation release is set to spark more volatility and inform investors about the likely direction of the FOMC and monetary policy.

Then on Thursday, markets will be awaiting the latest UK rates outlook by the Bank of England.

Here’s a list of potential market-moving data releases and economic events this week:

 

Monday, May 8

• AUD: Australia April business confidence and conditions
• EUR: Germany March industrial production
• UK bank holiday

 

Tuesday, May 9

• AUD: Australia May consumer confidence, April household spending, 1Q retail sales
• CNH: China April external trade
• USD: US President Joe Biden meeting on debt limit

 

Wednesday, May 10

• EUR: Germany April CPI (final)
• USD: US April CPI
• Disney earnings (after US markets close)

 

Thursday, May 11

• JPY: Bank of Japan meeting minutes
• CNH: China PPI and CPI
• GBP: Bank of England rate decision
• USD: US April PPI, weekly initial jobless claims

 

Friday, May 12

• GBP: UK data dump – Q1 GDP, March industrial production, trade balance
• USD: US May consumer sentiment

 

Last week’s 25bp rate hike could be the last in the most aggressive tightening cycle seen in living memory.

US banking jitters continue to lurk in the background soon with several regional banks still under pressure as depositors flee to much larger financial institutions.

Those two factors listed above could keep the pressure on the dollar, even though knockout job gains were seen in Friday’s non-farm payrolls report.

With all that in mind, here’s what economists are forecasting for this week’s pivotal inflation prints:

• Headline consumer price index (CPI) = rose 5% in April (matching March’s 5%)
   
• April core CPI = 5.5% (a tick lower than March’s 5.6%)

 

Signs of still-elevated inflationary pressures could dampen talk about a Fed hike pause in June, which in turn may help bolster the US dollar.

 

The day after the US CPI is released, and across the pond, the Bank of England gets handed the central bank policy decision baton on Thursday with money markets pricing in a 25bps rate hike.

With UK inflation stuck in double digits and wage growth strong, the BOE has little choice but to carry on hiking.

 That said, price pressures are forecast to drop sharply with punchy food and core goods inflation not viewed as long lasting.

Should BOE’s projections, coupled with commentary by Governor Andrew Bailet, predict upside risk to prices, then a further hike is possible in June.

The prospects of more BOE hikes relative to the Fed should help GBPUSD decisively overcome the 1.265 resistance.

Once that key resistance level is in the rearview mirror, Sterling bulls are set to eye the 1.27646 level which marks the 61.8% Fibonacci retracement from GBPUSD’s peak-to-trough action from the past couple of years.