• On Wednesday, the Office for National Statistics will release the top-tier UK CPI data for January.
• Headline and core annual inflation from the United Kingdom are set to rise, while monthly CPI will likely fall.
• The UK CPI report is set to influence the BoE’s interest rate path, rocking the Pound Sterling.

As the Bank of England (BoE) policymakers continue to push back against expectations of early rate cuts, traders of the pound sterling are eagerly awaiting the release of the high-impact Consumer Price Index (CPI) data from the United Kingdom (UK) on Wednesday, hoping for new clues regarding the timing of the BoE’s first interest rate cuts this year.

On February 14, at 7:00 GMT, the Office for National Statistics (ONS) is scheduled to release the UK inflation figures.

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What to expect from the next UK Inflation forecasts report?

The annual UK Consumer Price Index is expected to increase by 4.2% in January, continuing the upward trend from its November reading of 3.9%, which was the lowest since September 2021. However, the reading would still be higher than the BoE’s 2.0% target.

In January, the Core CPI inflation is expected to increase slightly to 5.2% YoY, following a 5.1% growth in December. Meanwhile, after rising by 0.4% in December, the British monthly CPI is predicted to show a 0.3% decrease.

Should the data show that inflation is persistent, much care will be taken to determine when the Bank of England may reverse course and adopt a more dovish stance.

 

After the robust Services PMI and the unanticipated increase in the December CPI data, markets reduced their expectations of an early and aggressive reduction in interest rates by the BoE. Compared to the odds of 100 basis points (bps) observed a week ago, only 70 basis points (bps) of total easing are anticipated in 2024, when the first decrease is currently priced for August.

While services are likely to have increased by a tenth more than the MPC anticipates, headline inflation is expected to equal the MPC’s projection, according to analysts at TD Securities (TDS) previewing the UK inflation data (TDS: 6.7%, BoE: 6.6%). This print is highly questionable, partly because of the increased weight.

The TDS analysts stated, “We see downside risks to our projections, partly because some components could normalize a bit more than we expect after December’s upside surprise.”

According to the most recent statistics released by the British Retail Consortium (BRC), food inflation decreased to its lowest level since June 2022 at 6.10%, while fresh food inflation slowed to 4.90%, which could account for any potential downward surprise in the CPI data.

The BRC hypothesized that merchants’ aggressive January promotions were intended to clear off their excess holiday inventory, so non-food prices dropped.

In the meantime, December’s 3M YoY growth in Average Earnings Excluding Bonus, a gauge of pay inflation, was 6.2%, down from the prior increase of 6.7%.

Nonetheless, the 5% increase in oil prices in January might have a greater effect than the decline in food prices and the rise in wages.

Speaking on the policy outlook on Monday at Lough borough University in England, Governor Andrew Bailey of the Bank of England stated that the Central Bank would place greater weight on data that looks forward. “Any UK recession will be shallow,” according to Bailey.

During its policy meeting in February, the Bank of England kept the key rate at 5.25%. In the forthcoming meetings, Governor Andrew Bailey did not commit to the next interest rate move by the Bank. There was a three-way split in the voting pattern, with two lawmakers voting for a hike and one member voting for a cut.

Rejecting expectations of rate cuts in the first half of this year, BoE policymakers have been trying to persuade markets that the Bank will adhere to its higher-interest-rate-for-longer story.

When will the UK Consumer Price Index report be released, and how could it affect GBP/USD?

The release of the UK CPI statistics is scheduled for this Wednesday at 07:00 GMT. With the United Kingdom’s inflation showdown approaching, the pound sterling has been more defensive against the US dollar. Despite decreased Fed rate reduction expectations and a geopolitical uptick in the Middle East, the US dollar continues to be supported.

The BoE’s hawkish stance may be reinforced by hot headlines and core inflation statistics, giving the pound sterling much-needed support. In such a scenario, the GBP/USD exchange rate may return to the psychological barrier of 1.2750. On the other hand, if the UK CPI data rises to the downside and resurrects expectations of a May BoE easing, GBP/USD might break the consolidate phase to the downside.

“The GBP/USD pair continues to range between two key technical barriers, with the 14-day Relative Strength Index (RSI) holding below the midline, suggesting that risks remain skewed to the downside for the Pound Sterling,” says Dhwani Mehta, Lead Analyst for FXStreet’s Asian session.

To start a new decline towards the 100-day SMA of 1.2495, there must be a clear break below the horizontal 200-day Simple Moving Average (SMA) at 1.2565. The psychological level of 1.2450 could be retested farther south. Alternatively, for the GBP/USD pair to maintain any upward trend towards the two-week high of 1.2786, acceptance over the confluence resistance at about 1.2670 is essential, according to Dhwani.

Pound Sterling price this week

The percentage change of the Pound Sterling (GBP) versus the major currencies listed this week is displayed in the table below. When compared to the Canadian dollar, the pound sterling was the weakest.

Conclusion

As CPI data comes into focus, market spectators and policymakers weigh the implications for the UK’s fiscal and monetary environment. Confirming strong inflation in January could reinforce the Bank of England’s hawkish stance, potentially providing the Pound with a leg-up against its forex peers.

With multiple forces at play, those with vested interests in the economy, from economists to financial analysts and traders, will closely scrutinize the CPI release for any signs of deviation from expectations or shifts in underlying economic patterns that could signal a change in course for the UK’s currency and broader financial health.