The UK Consumer Price Index (CPI) rose by 2.3% (forecast was 2.2%) in the 12 months to April 2024, down from 3.2% in the 12 months to March. This is the lowest level since July 2021, but despite the sharp drop, it still exceeded the forecast of 2.1%.

The core CPI slowed from 4.2% to 3.9%, also above the forecast of 3.6%, but for the first time since October 2021, the index fell below 4%. The growth in services prices remained high, slightly down from 6.0% to 5.9% year-on-year.

The negative impact of higher inflation was somewhat offset by the retail sales report, which showed a sharp decline in April by -2.3% (expected was -0.4%), indicating a possibility that inflation might significantly decrease in May, potentially bringing the issue of the Bank of England's rate cut back into focus. The problem is that the May inflation data will be released after the BoE's meeting, so the pound will likely reflect the market's reassessment of its outlook in favor of a bullish bias in the coming weeks.

The key question is whether the BoE will consider the slowdown enough to lower rates at the upcoming meeting on June 20. The chances of this step has understandably decreased; a week ago it was almost 60%, but after the report, it sharply fell to 15%, and expectations for the first rate cut have been pushed to August. The market predictably responded with increased demand for the pound. Now the main question is how sustainable the bullish momentum for the pound is.

Reports on mortgage and consumer lending will be released on Friday, which will likely allow for an adjustment of consumer activity indicators—the main factor driving domestic inflation. If so, the chances of seeing a rate cut on June 20 might increase. For now, it should be assumed that yields in the UK will remain high at least until August, maintaining demand for the pound. The outlook for the pound is bullish.

The fourth consecutive week of buying the British pound has led to a decline in the net short position, with a weekly change of +1.66 billion, the second highest among G10 currencies after the euro. A neutral bias, but the price is sharply rising, indicating that the bullish momentum is quite strong.

On Monday morning, the pound was trading near the resistance level of 1.2755, which we identified as the nearest target a week ago. We expect the pound to rise further, with a target of 1.2790/2810. The medium-term target shifts to the local high of 1.2892; a consolidation above this level will change the technical outlook for the pound to a more bullish one.