UK CPI inflation unexpectedly dips to 6.7% in August

• United Kingdom CPI rose 6.7% YoY in August vs. 7.1% expected.
• Monthly British inflation jumped to 0.3% in August vs. 0.7% expected.
• GBP/USD refreshes multi-month lows below 1.2350 on soft UK CPI inflation data.

The official data released by the Office for National Statistics (ONS) showed on Wednesday that the United Kingdom's (UK) annual Consumer Price Index (CPI) edged 6.7% higher in August, cooling off from a 6.8% rise in July. The market consensus was for a 7.1% increase.

The Core CPI index (excluding volatile food and energy items) rose 6.2% YoY in the reported month, compared with a 6.9% acceleration in July while missing estimates of a 6.8% clip.

The Services CPI rose 6.8% YoY vs. July’s 7.4% surge. The ONS said, “the largest downward contributions to CPI rates came from food and accommodation services.”

Meanwhile, the UK Consumer Price Index rebounded 0.3% MoM in August vs. the 0.7% estimates and the 0.4% decline recorded in the seventh month of the year.

The UK Retail Price Index (RPI) for August rose 0.6% MoM and 9.1% YoY, both missing expectations.

Commenting on the UK inflation data, the country’s Finance Minister Jeremy Hunt said, “today's news shows plan to deal with inflation is working.”

However, he was quick to add that “inflation is still too high.” “All the more important to stick to our plan to halve inflation,” Hunt said.

GBP/USD reaction

In a knee-jerk reaction to the UK CPI inflation data, the GBP/USD pair slumped nearly 40 pips to hit fresh multi-month lows below 1.2350. The spot is shedding 0.35% on the day to trade at 1.2345, as of writing.

GBP/USD: 15-minutes chart

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This section below was published at 02:15 GMT as a preview of the UK inflation data.

• The Office for National Statistics will release the UK inflation report on Wednesday.
• Core annual inflation is seen a tad lower at 6.8%, headline figure likely to increase.
• The UK CPI data could offer fresh cues on the BoE’s policy outlook and rock the Pound Sterling.

The United Kingdom’s Office for National Statistics (ONS) will release the high-impact Consumer Price Index (CPI) data on Wednesday. The British inflation report is set to have a significant influence on the Bank of England’s (BoE) path forward on interest rates, eventually impacting the Pound Sterling valuations.

The BoE is expected to follow the footsteps of the European Central Bank (ECB) and signal no more rate hikes this year after delivering a 25 basis points (bps) rate increase on Thursday. Markets are pricing a 75% chance of such a hike. Mounting stagflation risks and cooling labor market conditions could lead the BoE to convey a dovish message.

The United Kingdom’s ILO Unemployment Rate climbed to 4.3% in the quarter through July from the 4.2% seen during the three months to June. The economy saw an employment loss of 207K in July, having shredded 66K jobs in June. The Average Earnings excluding bonuses rose 7.8% 3M YoY in July as expected, but at a joint-record pace.

The August UK inflation report could help markets reprice BoE policy expectations beyond the September meeting.

What to expect in the next UK inflation report?

The headline annual UK Consumer Price Index is set to rise 7.1% in August, compared to a 6.8% growth reported in July. The Core CPI is expected to rise 6.8% YoY in August, slightly down from July’s 6.9% increase. On a monthly basis, Britain’s CPI is seen rebounding to 0.7% in the eighth month of the year, having declined by 0.4% in July.

The surge in Oil prices and an increase in the alcohol tax are likely to contribute to the renewed uptick in headline inflation. “I agree with the MPC that the risks to inflation around the August forecast are to the upside,” BoE Deputy Governor appointee, Sarah Breeden, said last week.

Previewing the event, analysts at BBH noted: “August CPI will be reported Wednesday. Headline is expected at 7.1% y/y vs. 6.8% in July, core is expected at 6.8% y/y vs. 6.9% in July, and CPIH is expected at 6.6% y/y vs. 6.4% in July.  If so, this would be the first acceleration in the headline since February and would move it further above the 2% target.”

“WIRP [World Interest Rate Probability, a gauge by Bloomberg] suggests odds of a 25 bp hike are around 85%. For a time over the summer, a 50 bp hike was largely priced in and so the change is noteworthy. Odds of a second 25 bp hike are around 15% for November 2 and then rise to top out near 55% for February 1. However, the first cut is still not priced in until H2 2024,” the analysts added.

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

The UK CPI data will be published at 06:00 GMT on Wednesday. Progressing toward the all-important inflation data from the United Kingdom, the Pound Sterling (GBP) is struggling around a three-month low of 1.2379 against the US Dollar set on Friday. Expectations of a US Federal Reserve (Fed) rate hike pause this week are helping GBP/USD find a floor.

A hotter-than-expected headline and core inflation data could reinforce expectations of one more BoE rate hike by the year-end, providing extra legs to the ongoing recovery in the Pound Sterling.  In such a case, GBP/USD could build onto its rebound toward 1.2500. Conversely, should the core figure come in softer than the market consensus, GBP/USD is likely to see a fresh downswing toward the 1.2308 critical support.

Meanwhile, Dhwani Mehta, Asian Session Lead Analyst at FXStreet, offers a brief technical outlook for the major and explains: “The 14-day Relative Strength Index (RSI) is listless just above the oversold territory while GBP/USD continues to extend its consolidative mode just below the 200-day Simple Moving Average (DMA). These technical indicators suggest that the downside potential remains intact in the pair. 

Dhwani also outlines important technical levels to trade the GBP/USD pair: “The major needs acceptance above the 200 DMA at 1.2433 to initiate a meaningful recovery from three-month lows. The next powerful resistance for the Pound Sterling is seen at the 1.2500 level. On the downside, sellers could target 1.2350 if the recent range is broken to the downside. Further south, GBP/USD will challenge the May low of 1.2308.”