The recent downgrade in inflation forecasts by the central bank has added to the overall dovish tone in monetary policy decisions. The projections indicate that inflation is expected to reach the 2.0% target in Q2 of this year, with a subsequent increase to approximately 2.6% in the second half of the year. However, these figures are lower than the previous forecast, with inflation anticipated to be 1.9% by Q2 of 2026 and slowing down to 1.6% by 2027.
The upcoming policy meeting in June will be crucial, with two key inflation prints and wage/employment releases scheduled before the event. Economists are closely monitoring these releases, particularly looking for any significant deviation to the downside. A substantial decrease in earnings and wages could potentially lead to trading opportunities for GBP shorts, especially if the unemployment rate shows an increase. The probability of a rate cut in June is currently estimated at 60%, with the OIS curve already pricing in 61bps of easing for the entire year.
Apart from domestic factors, the US CPI inflation report scheduled for Wednesday will also play a critical role in shaping monetary policy decisions. Economists are predicting a year-on-year headline inflation rate of +3.4% in April, down from +3.5% in March. The month-on-month data is expected to show an increase of +0.4%, matching the previous month’s figures. The estimates for both events have a reasonably narrow range, indicating a level of consensus among analysts.
The recent downgrade in inflation forecasts has had a notable impact on monetary policy decision-making, with markets closely watching key economic data releases for further insights. The dovish tilt in projections and expectations of a rate cut highlight the cautious approach adopted by central banks in response to evolving economic conditions. As investors navigate through the uncertainty fueled by these developments, staying informed and agile will be crucial in capitalizing on potential trading opportunities in the near term.