The GBP/USD exchange rate retreated from a multi-month peak of 1.3444 hit yesterday. That drop comes as UK high street price data gives contradictory signals. Underlying measures of inflation remain, shop prices are still in deflation, and food inflation has more than doubled. Unfortunately, market participants have already raised their expectations. They are pricing in a 25 basis points (bps) reduction by the Bank of England (BOE) at its next meeting on May 8, as well as 100 bps of total easing over the next year.
The recent peak of 1.3444 was a notable high tide line for the British pound versus the buck. As traders digested the most recent economic releases, the currency pair saw a pullback. In April, the British Retail Consortium (BRC) reported that the retail shop price index fell by 0.1% over last year. This drop was more than double what markets had expected, which was a 0.2% decline. It was the largest increase since a decline of 0.4% in March.
Despite the wider trend of falling shop prices, as the BRC’s report shows, that’s not the case for food prices. They’ve begun to climb. We keep hearing that food price inflation is accelerating at an unprecedented pace. At the same time, non-food prices are declining, producing a confusing economic picture for households and policymakers.
We BBH FX analysts have been generally encouraged by the current economic backdrop for the BOE. They point out that the monetary authority could restart its easing agenda as early as next month. With growing downside risks to the UK economy and cooling services inflation, the central bank is likely to consider further monetary policy adjustments.
“The Bank of England (BOE) has room to resume easing policy next month because downside risk to the UK economy is growing and services inflation is cooling. Markets have fully priced-in a 25bps rate cut at the next May 8 meeting and 100bps of total easing over the next 12 months.” – BBH FX analysts
As the market anticipates these changes in monetary policy, traders are closely monitoring economic indicators that could affect future rate decisions. The pullback in GBP/USD might just be a function of overall markets’ moods about economic strength and rate outlooks.
Additionally, the contradictory signals from the retail sector brings about uncertainty to what we can expect in terms of consumer spending. Deflation is still having a negative impact on growth in shop prices. Analysts should keep a watchful eye on its effect on consumer behavior going forward.
Now, spiraling food inflation and an apparent statewide deflation in non-food sectors are colliding in the UK. This new development has the potential to greatly benefit consumers and businesses. The impact of climbing food prices will add to pressure on families’ budgets, and the relief of stabilizing non-food prices should take some pressure off household budgets.
They noted:
“GBP/USD retreated from yesterday’s multi-month high at 1.3444. UK retail outlet price pressure still in deflation. The BRC shop price index fell -0.1% y/y in April (consensus: -0.2%) vs. -0.4% in March. The breakdown showed food price inflation quickening while the decline in non-food prices eased.” – BBH FX analysts