Later this afternoon, the UK will release April’s inflation report. Following last week's BoE meeting, investors will undoubtedly react negatively to an upside surprise in inflation. Indeed, Mark Carney warned that UK consumers will be squeezed this year as price pressures pick-up. Headline inflation is expected to come in at 2.6% y/y from 2.3% in the previous month, while the core measure should rise from 1.8% y/y to 2.3%.
The BoE made clear that it won’t raise borrowing costs should inflation pressure be fuelled by further GBP weakness, they would only do so if the UK gets a good divorce deal with the European Union. GBP/USD was up 0.40% this morning amid a broad-based USD sell-off. However, the pound lost ground against the single currency amid renewed hopes for a stronger European Union following Emmanuel Macron taking office.
EUR/GBP returned to 0.8537 on Tuesday morning and is currently trying to break its 50dma, which currently stands at 0.8541, to the upside. We maintain our long EUR / short GBP view on the pair, especially since Macron and Angela Merkel seem to want a closer relationship in order to shake up Europe. That does not bode well for the Brexit negotiation as it increases the odds that the EU will take a tougher stance towards the United Kingdom.
By Arnaud Masset