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    UK CPI unchanged but it’s all about Brexit


    GBPUSD, Daily        

    UK May CPI remained unchanged at 0.3% y/y, below the median for 0.4% y/y. Rising transport costs and restaurant bills were principal upward drivers. Core CPI also came in unchanged, at 1.2% y/y. The data fits BoE projections, which is also expecting prices to rise markedly in the second half of the year on the back of rising energy prices, though the central bank still thinks CPI will remain below 2% at its two-year forecasting horizon. The wildcard will be if the UK votes to leave the EU, which would more than likely trigger a sharp drop in sterling (most think to around 1.20 versus the dollar) and which would in turn drive inflation well above BoE forecasts. As was the case in the 2008-2014 period, when CPI remain above the 2% target, the BoE would like ignore a post-Brexit spike in inflation.

    The UK PPI data that was released at the same time was a little stronger than expected, however, sterling continues to trade lower.  1.4050 marks the April low and 1.3850 the 2016 low with Brexit woes continuing to dominate sentiment.


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    Stuart Cowell

    Market Analyst 


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