British Pound May Fall as Soft CPI Data Undercuts BOE Rate Hike Bets

Talking Points:

• British Pound May Fall as Soft June CPI Undercuts BOE Rate Hike Bets
• Aussie Dollar Little-Changed as July’s RBA Minutes Maintain Status Quo
• Japanese Yen Unmoved as BOJ Keeps Monetary Policy Mix Unchanged

June’s UK CPI figures headline the economic calendar in European hours. The headline year-on-year inflation rate is expected to edge higher to 1.6 percent having slumped to a five-year low of 1.5 percent in the prior month. UK price-growth readings have proven increasingly disappointing over recent months. Indeed, a Citigroup gauge measuring realized inflation data outcomes relative to consensus forecasts dropped to the lowest level in nearly two decades last month. That suggests analysts are underestimating the degree of deterioration in pricing trends and opening the door for a downside surprise.

A lower-than-expected CPI print is likely to plant seeds of doubt in investors’ effervescent BOE interest rate hike expectations. A distinctively hawkish shift in Governor Carney’s rhetoric in recent weeks has been taken at face value, pushing the British Pound upward alongside front-end bond yields. UK economic data has increasingly fallen short of expectations since February however, meaning Mr. Carney is likely to have a difficult time securing a majority on nine-person MPC committee to raise the baseline interest rate even if he resigned to do so. An eye-catching miss on the baseline inflation gauge threatens to put such concerns in stark relief, forcing investors to pare back runaway tightening bets and sending Sterling lower.

The Australian Dollar was little-changed after minutes from July’s RBA policy meeting reiterated the status quo – calling for a “period of stability in interest rates” – and offered no meaningful clues on where it intends to steer thereafter. A monetary policy announcement from the Bank of Japan was likewise a non-event, leaving the Yen rudderless. Governor Haruhiko Kuroda and company maintained the plan to grow the money supply by ¥270 trillion in the current fiscal year and maintained most of their economic projections unchanged (with the exception of a slight downgrade in expected FY2014 GDP growth, from 1.1 to 1.0 percent).

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--- Written by Ilya Spivak, Currency Strategist for DailyFX.com

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