[MARKET ANALYSIS] Less hawkish BoE pricing encouraged by soft April CPI and weaker energy complex this morning

Sterling weakened modestly this morning after soft April inflation data and energy weakness trimmed bets on BoE hikes. GBP/USD moved lower by c. 15pips post-data, now above pre-release levels as it attempts to regain a 1.34 handle. EUR/GBP moved higher by 10pips post-data, a move which swiftly pared amid resistance at 0.8670 and recent energy-related moves. Gilts opened higher by 43 ticks and attempted to build on gains before chopping in tandem with energy prices. The rest of the session sees the BoE Treasury Select Committee, which will see remarks from Bailey (Neutral), Breeden (Dovish), Dhingra (Dove), Mann (Hawk). 

UK Inflation: CPI slowed to 2.8% in April, from 3.3% in March and below consensus of 3.0%. During the period, the Treasury froze select government-set prices and green levies from energy bills, while raising water bills - contributing to the rise in Housing services. ONS noted the smaller rises in water and sewage bills than seen last year helped bring rates down. On energy, ONS said "The annual cost of both raw materials and goods leaving factories continued to rise, driven again by higher crude oil and petrol prices." 

BoE: The penultimate inflation print before the June BoE announcement, where May’s data is scheduled the day before so potentially not enough time for the MPC to determine a hike with just 2bps of tightening priced. Therefore, with both inflation easing by more than expected, and a softening labour market as published this week, the skew for the BoE towards them remaining on hold at this point. However, the May CPI series comes the day before the June BoE, and will likely see a return of price pressures as the Middle East impact reverberates through, a point that may be enough to convince more than just Pill to vote for a hike.

BoE Pricing: 

• June 8.6bps -> 2bps 
• July 22bps -> 14bps 
• September 37bps -> 29bps 
• November 50bps -> 42bps 
• December 61.6  -> 52bps 

Analyst Commentary

• ING: We now look for UK inflation to peak just shy of 4% later this year. A June rate hike looks pretty much 50:50, but it narrowly remains our call given ING’s base case for energy prices. On that basis, we are less bullish on EUR/GBP in spite of the ongoing political turmoil.
• Pantheon Macro: The data writes off June tightening, investors should look through some of the data with downside surprise driven by erratic factors, such as airfares and package holidays. We expect a July hike.