On the eve of the Bank of England's meeting scheduled for Thursday, June 19, the UK released important inflation growth data. While the release showed a clear trend, traders responded indifferently, effectively ignoring the publication. However, in this case, it is not the release itself that matters; it is the interpretation by the central bank. Therefore, GBP/USD traders are in no hurry to open large positions: the pair is calmly circling within the 34th figure, waiting for the Federal Reserve and BoE meetings.
According to the data released on Wednesday, the headline Consumer Price Index rose by 0.2% month-on-month, in line with forecasts, following a sharp surge to 1.2% the previous month (driven primarily by an increase in the road tax). On a year-over-year basis, the index slowed in May to 3.4%, as expected by most analysts. Despite this slowdown (the April reading was 3.5%), the index remains relatively high. The last time it hovered around 3.2%–3.4% was in the spring of 2024.
Core CPI, which excludes energy and food prices, fell to 3.5% year-on-year after rising to 3.8% the previous month. This figure came in below expectations, as experts had forecast a reading of 3.6%. Service CPI, closely watched by the BoE, also fell short of projections, coming in at 4.7% versus an expected 4.8%.
The Retail Price Index (RPI), used by employers in wage negotiations, also slowed. Month-on-month, it fell to 0.2% in May from a sharp spike to 1.7% in April. Year-on-year, the index dropped slightly to 4.3% from 4.5%. However, the figure remains uncomfortably high—by comparison, the annual RPI in March was 3.2%.
This release primarily indicates that the spike in April inflation, particularly on a monthly basis, was driven by temporary factors. The situation normalized in May, reflected in a slowdown of headline and core CPI. Traders responded calmly, as the May report essentially has no bearing on the BoE's June decision: the central bank is almost certain to leave all monetary policy parameters unchanged. However, the release does allow the central bank to soften the tone of its accompanying statement. The market will interpret dovish undertones in the final communique as a signal for a potential rate cut at the August or September meeting.
Recent UK economic data further support this scenario. UK GDP in April fell by 0.3% month-on-month—the lowest level since November 2023 (the forecast was –0.1%). Quarter-on-quarter, GDP remained unchanged at 0.7%. Year-on-year, the economy grew by 0.9%, the weakest reading since July 2024. This component of the report has declined for the second consecutive month. Other components also disappointed. For example, industrial production fell by 0.6% month-on-month.
The cooling labor market is another fundamental factor supporting a dovish shift from the central bank. Unemployment in the UK rose to 4.6%, the highest since July 2021, while jobless claims rose by 33,000—the largest increase since August last year.
In addition, it's important to recall the statement made by BoE Governor Andrew Bailey in the House of Commons, where he noted that the pace of future rate cuts would depend on wage growth. According to the latest data, wage growth has slowed more than expected.
Thus, the overall fundamental backdrop supports the BoE's tone softening. If the central bank does ease its wording, the market will again start talking about two additional rate cuts—one in August or September and another at one of the two remaining meetings this year (in November or December).
Naturally, the direction of GBP/USD depends not only on the BoE's decisions or statements. Traders in dollar pairs are currently focused on the Middle East conflict and the potential involvement or non-involvement of the United States. Therefore, it would be premature to prioritize short positions in GBP/USD, especially given Donald Trump's contradictory statements. On the one hand, he is calling for Tehran to "surrender" (Iran's Supreme Leader Ali Khamenei has already rejected this), and on the other hand, he is urging the Iranians to come to the negotiating table. The situation remains in limbo, and no one knows how the balance will tip.
Therefore, despite all the arguments mentioned above, opening any trading positions in GBP/USD remains risky. All other fundamental factors fade into the background when geopolitics takes center stage.
