BoE decision Thursday.

US consumer prices increased 0.4% in April with the year-on-year inflation rate declining to 4.9% from 5.0%. This was marginally below expectations of 5.0% and the lowest headline rate since February 2021.

Food prices were unchanged on the month with a 7.7% annual increase while energy prices declined 5.6% over the year despite a monthly increase of 0.6%. Underlying prices increased 0.4% on the month with the year-on-year increase slowing to 5.5% from 5.6% and both metrics were in line with expectations.

There was a strong rebound in truck prices for the month, but some moderation in the rate of increase in shelter costs.

ECB President Lagarde stated that the central bank had to be very attentive to inflation risks with a particular focus on wage increases. In this context, she stated that there was more work to do on interest rates.

There were also source reports from the ECB that rate hikes may need to be continued until September. Bundesbank head Nagel stated that there was more work to do, but he added that the central bank might be approaching the final straight of rate increases.

After the US inflation data, markets remain confident that the Fed will hold rates at 5.25% in June. Markets are also pricing in 75 basis points of rate cuts by the end of 2023.

The Euro and Sterling jumped after the US inflation data but were unable to hold the gains and reversed quickly. EUR/USD was unable to hold above the 1.1000 level and GBP/USD failed to sustain a move to 12-month highs at 1.2680.

The Bank of England will announce its latest interest rate decision on Thursday. There are strong expectations that the bank will increase interest rates by a further 25 basis points to 4.50% with another split vote. Forward guidance and communication from the bank will inevitably be a key element for UK markets.

Narrow ranges prevailed ahead of the US inflation data. The dollar dipped in response to the inflation data, but pared losses quickly. EUR/USD hit selling just above the 1.1000 level and settled around 1.0970. There was little net change on Thursday with EUR/USD ticking higher.

Lower US yields helped underpin the yen with the currency also resilient on the crosses. USD/JPY dipped sharply to lows below 134.00 before a tentative recovery to 134.25 on Thursday.

The Swiss franc was marginally weaker with narrow ranges. EUR/CHF edged higher to 0.9775 with USD/CHF settling around 0.8910.

Sterling was unable to hold gains during the day with position adjustment ahead of the Bank of England announcement. GBP/USD briefly hit a 12-month high at 1.2680 before a quick retreat to 1.2615 and settled little changed on Thursday.

Commodity currencies jumped after the US inflation data, but failed to hold intra-day highs. AUD/USD dipped from 2-month highs at 0.6820 and traded at 0.6775 on Thursday. USD/CAD rallied from 1.3335 lows to trade around 1.3380.

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