All the focus and attention this week is on the US CPI report on Wednesday. But just before that, we will be getting the same report from the UK as well. The thing is given base effects, it is estimated that headline annual inflation in the UK is going to increase from 2.0% in June to 2.3% in July. That will mark the first increase in said reading since December last year.
UK CPI year-on-year (%)
Logically, this plays into the view among major central banks now that the disinflation process is going to encounter some “bumps along the road”. But this is a market that was very much driven by emotions for the past week or so. As such, market players may not be as composed as you would expect in seeking out a logical reaction initially.
The key detail though will be the core annual inflation reading. That is estimated to hold similar to June at 3.5%. If so, that is likely to help calm the nerves among traders. However, if there is an upside surprise there, then we could see risk trades start to get a bit jittery again ahead of the US CPI report later on in that day.
The BOE already made a cut to its bank rate in a knife-edge call at the start of this month here. They followed that up in saying that markets should not expect continuous rate cuts. And that is precisely what is priced right now. Traders are only seeing ~36% odds of a rate cut in September. So, the inflation numbers this week could seal the deal for a no change decision.
To summarise, I wouldn’t underestimate the impact of the UK report for broader market sentiment. It could yet produce keep traders on edge in fear that the US numbers might also be sticky. Although, I doubt that will be the case. The disinflation process in the US is still ongoing, albeit very gradually. And this week’s numbers should stick with that trend and narrative. But we’ll see about that and stay mindful for any surprises that could come along the way.
