UK inflation stays unchanged at 4.0% YoY in January

United Kingdom CPI rose 4.0% YoY in January vs. 4.2% forecast.
Monthly British inflation fell to -0.6% in January vs. -0.3% estimate.
GBP/USD drops below 1.2600 on UK CPI inflation data.

Consumer Price Index (CPI) in the United Kingdom (UK) rose at an annual rate of 4.0% in January, steadying from that seen in December, according to the data released by the Office for National Statistics (ONS) on Wednesday. The market expectations were for a 4.2% increase.

The Core CPI (excluding volatile food and energy items) edged higher by 5.1% YoY in January, at the same pace as seen in December while missing estimates of 5.2%.

Meanwhile, the UK Consumer Price Index dropped 0.6% MoM in January vs. expectations of a 0.3% decline and December’s 0.4% print.

Commenting on the January UK inflation report, the country’s Finance Minister Jeremy Hunt said, “we have made huge progress in bringing inflation down.”

“Inflation never falls in a perfect straight line, but the plan is working,” he added.

GBP/USD reaction to the UK CPI inflation data

GBP/USD came under intense selling pressure on the downbeat UK headline CPI data, dropping back below 1.2600. The pair is trading at 1.2564, down 0.17% on the day.

GBP/USD:5-minutes chart

Pound Sterling price today

The table below shows the percentage change of Pound Sterling (GBP) against listed major currencies today. Pound Sterling was the weakest against the New Zealand Dollar.

	USD	EUR	GBP	CAD	AUD	JPY	NZD	CHF
USD		-0.01%	0.17%	-0.09%	-0.30%	-0.16%	-0.40%	-0.12%
EUR	0.01%		0.18%	-0.07%	-0.28%	-0.16%	-0.33%	-0.09%
GBP	-0.17%	-0.18%		-0.25%	-0.46%	-0.33%	-0.56%	-0.28%
CAD	0.09%	0.07%	0.25%		-0.21%	-0.08%	-0.27%	-0.03%
AUD	0.29%	0.28%	0.46%	0.21%		0.13%	-0.05%	0.17%
JPY	0.17%	0.14%	0.04%	0.09%	-0.14%		-0.23%	0.05%
NZD	0.40%	0.34%	0.51%	0.26%	0.05%	0.19%		0.25%
CHF	0.13%	0.11%	0.30%	0.05%	-0.16%	-0.05%	-0.26%

The heat map shows percentage changes of major currencies against each other. The base currency is picked from the left column, while the quote currency is picked from the top row. For example, if you pick the Euro from the left column and move along the horizontal line to the Japanese Yen, the percentage change displayed in the box will represent EUR (base)/JPY (quote).

This section below was published at 23:15 GMT on Tuesday as a preview of the UK inflation data.

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

Pound Sterling traders keenly await the release of the high-impact Consumer Price Index (CPI) data from the United Kingdom (UK) on Wednesday, for fresh hints on the timing of the Bank of England’s (BoE) first interest rate cuts this year, as the BoE policymakers continue to push back against expectations of early rate cuts.

The Office for National Statistics (ONS) is due to publish the UK inflation data at 07:00 GMT on February 14.

What to expect from the next UK inflation report?

The headline annual UK Consumer Price Index is forecast to rise 4.2% in January, continuing its rebound from its lowest level since September 2021, registered at 3.9% in November. However, the reading would still be more than twice the BoE’s 2.0% target.

The Core CPI inflation is seen inching a tad higher to 5.2% YoY in January after reporting a 5.1% growth in December. Meanwhile, the British monthly CPI is expected to register a 0.3% decline, following December’s 0.4% increase.

The data will be closely scrutinized to gauge the timing of the Bank of England’s dovish policy pivot, should it indicate inflation persistence.

Following the unexpected uptick in the December CPI data and strong Services PMI, markets scaled back BoE expectations of early and aggressive interest rate cuts. The first cut is now priced in for August and only 70 basis points (bps) of total easing is seen in 2024, as against the odds of 100 bps seen a week ago.

Previewing the UK inflation data, analysts at TD Securities (TDS) noted that “we look for headline inflation to match the MPC's forecast while services likely rose a tenth more than the MPC expects (TDS: 6.7%, BoE: 6.6%). There is a lot of uncertainty around this print, in part due to the new weights.”

“On net, we see downside risks to our projections, in part as some components could normalize a bit more than we expect after December's upside surprise,” the TDS analysts said.

The potential downside surprise in the CPI data could be justified by a drop in food inflation, which hit its lowest rate since June 2022 at 6.10%, while fresh food inflation slowed to 4.90%, the latest data published by the British Retail Consortium (BRC) showed

The BRC suggested that the non-food price drops came from retailers promoting heavily in January to unload their leftover holiday inventory.

Meanwhile, Average Earnings Excluding Bonus, a measure of wage inflation, rose 6.2% 3M YoY in December, slowing from the previous increase of 6.7%.

However, the 5% surge in Oil prices during January could outweigh the impact of softening food prices and wage inflation.

Speaking at England's Loughborough University on Monday, BoE Governor Andrew Bailey said that the central bank would put more emphasis on forward-looking data, commenting on the policy outlook. Bailey said that “any UK recession will be shallow.”

At its February policy meeting, the BoE maintained the key rate at 5.25%. Governor Andrew Bailey remained non-committal on what will be the Bank’s next interest rate move in the upcoming meetings. The voting pattern revealed a three-way split, with one member having voted in favor of a cut and two policymakers voting for a hike.

Recently, BoE policymakers have tried to convince markets that the Bank will likely stick to its higher-interest-rate-for-longer narrative, pushing back against easing expectations in the first half of this year.

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

The UK CPI data is due for release on Wednesday at 07:00 GMT. The Pound Sterling has been on the defensive against the US Dollar in the lead-up to the United Kingdom’s inflation showdown. The US Dollar stays supported amid the Middle East geopolitical escalation and reduced Fed rate cut bets.

Hot headline and core inflation data could reinforce the BoE’s hawkish bias, providing a much-needed boost to the Pound Sterling. In such a case, GBP/USD could revert toward the 1.2750 psychological barrier. Conversely, GBP/USD could break the consolidative phase to the downside if the UK CPI data surprises to the downside and revives BoE easing expectations as early as May.

Dhwani Mehta, Asian Session Lead Analyst at FXStreet, offers a brief technical outlook for the major and explains: “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.”

“A decisive break below the horizontal 200-day Simple Moving Average (SMA) at 1.2565 is needed to initiate a fresh downtrend toward the 100-day SMA of 1.2495. Further south, the 1.2450 psychological level could be retested. Alternatively, acceptance above the confluence resistance at around 1.2670 is critical for GBP/USD to sustain any upswing toward the two-week high of 1.2786,” Dhwani adds.

Economic Indicator

United Kingdom Consumer Price Index (YoY)

The United Kingdom (UK) Consumer Price Index (CPI), released by the Office for National Statistics on a monthly basis, is a measure of consumer price inflation – the rate at which the prices of goods and services bought by households rise or fall – produced to international standards. It is the inflation measure used in the government’s target. The YoY reading compares prices in the reference month to a year earlier. Generally, a high reading is seen as bullish for the Pound Sterling (GBP), while a low reading is seen as bearish.

Why it matters to traders

The Bank of England is tasked with keeping inflation, as measured by the headline Consumer Price Index (CPI) at around 2%, giving the monthly release its importance. An increase in inflation implies a quicker and sooner increase of interest rates or the reduction of bond-buying by the BOE, which means squeezing the supply of pounds. Conversely, a drop in the pace of price rises indicates looser monetary policy. A higher-than-expected result tends to be GBP bullish.

BoE FAQs

What does the Bank of England do and how does it impact the Pound?

The Bank of England (BoE) decides monetary policy for the United Kingdom. Its primary goal is to achieve ‘price stability’, or a steady inflation rate of 2%. Its tool for achieving this is via the adjustment of base lending rates. The BoE sets the rate at which it lends to commercial banks and banks lend to each other, determining the level of interest rates in the economy overall. This also impacts the value of the Pound Sterling (GBP).

How does the Bank of England’s monetary policy influence Sterling?

When inflation is above the Bank of England’s target it responds by raising interest rates, making it more expensive for people and businesses to access credit. This is positive for the Pound Sterling because higher interest rates make the UK a more attractive place for global investors to park their money. When inflation falls below target, it is a sign economic growth is slowing, and the BoE will consider lowering interest rates to cheapen credit in the hope businesses will borrow to invest in growth-generating projects – a negative for the Pound Sterling.

What is Quantitative Easing (QE) and how does it affect the Pound?

In extreme situations, the Bank of England can enact a policy called Quantitative Easing (QE). QE is the process by which the BoE substantially increases the flow of credit in a stuck financial system. QE is a last resort policy when lowering interest rates will not achieve the necessary result. The process of QE involves the BoE printing money to buy assets – usually government or AAA-rated corporate bonds – from banks and other financial institutions. QE usually results in a weaker Pound Sterling.

What is Quantitative tightening (QT) and how does it affect the Pound Sterling?

Quantitative tightening (QT) is the reverse of QE, enacted when the economy is strengthening and inflation starts rising. Whilst in QE the Bank of England (BoE) purchases government and corporate bonds from financial institutions to encourage them to lend; in QT, the BoE stops buying more bonds, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive for the Pound Sterling.

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