UK CPI growth set to climb back above 2% in October, reducing odds of another BoE interest-rate cut

• United Kingdom’s Office for National Statistics is set to publish the CPI report on Wednesday.
• The annual UK headline CPI inflation is expected to rise in October, with the core figure easing slightly.
• The UK CPI data could signal a BoE December interest-rate cut pause, fuelling a Pound Sterling sell-off.

The United Kingdom’s (UK) Consumer Price Index (CPI) data for October will be published by the Office for National Statistics (ONS) on Wednesday at 07:00 GMT.

The UK CPI inflation report could provide fresh cues on the Bank of England’s (BoE) path forward on interest rates, which will likely have a strong bearing on the Pound Sterling.

What to expect from the next UK inflation report?

The UK Consumer Price Index is set to rise at an annual pace of 2.2% in October after increasing by 1.7% in September, moving back above the BoE’s 2.0% target.

The core CPI inflation is expected to ease slightly to 3.1% YoY in October, compared with a 3.2% reading reported in September.

According to a Bloomberg survey of economists, official data is expected to show that service inflation eased slightly to 4.8% in October from 4.9% in the prior month.

The BoE projected the annual headline CPI to be 2.2% and the services CPI to be 5.0% in October.

Meanwhile, the British monthly CPI is seen rising 0.5% in the same period, compared to the previous reading of 0%.

Previewing the UK inflation data, Societe Generale analysts noted: “We expect base effects and higher utility prices to push headline inflation back above its 2.0% target in October to 2.2% year-over-year (YoY), up from 1.7% YoY in September. More importantly, we see services inflation rising by 0.1 percentage point (pp) to 5% YoY, although the risks are tilted to the downside.” 

How will the UK Consumer Price Index report affect GBP/USD?

Following the November 7 decision to cut rates by 25 basis points (bps) to 4.75%, the BoE retained its cautious language on future interest rate cuts. In its policy statement, the central bank reiterated that it would need to stay "restrictive for sufficiently long" to return inflation sustainably to the 2.0% target.

The BoE predicted that the UK Finance Minister Rachel Reeves' Autumn Budget 2024 will increase the GDP size while adding to the inflationary pressures.  

Testifying before the UK Parliament’s Treasury Select Committee (TSC) on Tuesday, Governor Andrew Bailey said that reiterated that the Labour government's tax rises reinforce the central bank’s gradual approach to easing interest rates,

Against this backdrop, the UK CPI data holds the key to gauging whether the BoE will pause its easing trajectory following its second rate cut since 2020 earlier this month.

A hotter-than-expected headline and core inflation data would ramp up bets for a BoE pause, lifting the Pound Sterling. In this case, GBP/USD could initiate a sustained recovery from six-week troughs. On the other hand, softer-than-expected inflation readings could exacerbate the pain in the Pound Sterling, smashing the GBP/USD toward 1.2500.

Dhwani Mehta, Asian Session Lead Analyst at FXStreet, offers a brief technical outlook for the major and explains: “GBP/USD holds its recovery mode in the UK CPI data release countdown. However, the 14-day Relative Strength Index (RSI) stays below 50, suggesting that downside risks remain intact. Further, the 21-day Simple Moving Average (SMA) looks to cut the 200-day SMA from above, representing an impending Death Cross on the daily time frame and adding credence to the bearish potential.”

Dhwani adds: “The pair could extend the recovery toward 1.2750 psychological resistance, above which the 200-day SMA at 1.2820 will be challenged. The next upside target is seen at the  21-day SMA at 1.2858. Conversely, the immediate support is seen at the multi-month lows of 1.2597, below which the 1.2500 round level could be tested.”