UK CPI data for August shouldn’t move the needle for the Bank of England

The United Kingdom’s CPI is foreseen to grow at stable pace of 2.2% in the year to August.
The Bank of England will announce its monetary policy decision on Thursday.
The Pound Sterling is technically bullish and could surpass the 1.3300 mark.

The United Kingdom (UK) Office for National Statistics (ONS) will release August Consumer Price Index (CPI) figures on Wednesday. Inflation, as measured by the CPI, is one of the main factors on which the Bank of England (BoE) bases its monetary policy decision, meaning the data is considered a major mover of the Pound Sterling (GBP).

The BoE met in August and decided to trim the benchmark interest rate by 25 basis points (bps) to 5%, a decision supported by a slim majority of 5 out of the 9 voting members of the Monetary Policy Committee (MPC). The widely anticipated announcement had a negative impact on the GBP, which entered a selling spiral against the US Dollar, resulting in the GBP/USD pair bottoming at 1.2664 a couple of days after the event.

What to expect from the next UK inflation report?

The UK CPI is expected to have risen at an annual pace of 2.2% in August, matching the July print. The core annual reading is foreseen at 3.5%, higher than the previous 3.3%. Finally, the monthly index is expected to grow by 0.3% after falling by 0.2% in July.

It is worth adding that the BoE will announce its monetary policy on Thursday and that inflation levels could affect policymakers' decision. Ahead of the announcement, financial markets anticipate officials will keep rates on hold before adopting a more aggressive stance from November on. The central bank anticipated that inflation could reach 2.75% in the upcoming months before gradually declining and even falling below the 2% goal in 2025.

Meanwhile, the BoE released a quarterly survey on public inflation expectations last week, which showed that inflation for the next 12 months is expected to fall to 2.7%, the lowest in three years. However, the 5-year perspective ticked higher, to 3.2% from 3.1% in May. The figures support the case for on-hold rates, and so will the expected CPI outcome.

Finally, it is worth noting that the UK entered a technical recession in the last quarter of 2023. Ever since the economy has recovered, but growth is sluggish, and the risk of another setback remains.

In such a scenario, a mild deviation from the expected figures could have a limited impact on Pound Sterling. Higher than-anticipated readings could cool down hopes for aggressive rate cuts, but the path is clear. The BoE will reduce interest rates and there is no room for hikes. Even further, market participants don’t expect the BoE to deliver a cut when it meets later this week, which would likely reduce the potential impact on the currency.

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

The UK Office for National Statistics will release August CPI data figures on Wednesday at 06:00 GMT. Before analysing potential scenarios, there’s still one more thing to consider: Despite headline inflation hovering around the central bank’s goal, services inflation has remained quite hot and above 5% for most of the year, more than doubling the headline one.

As said, a modest uptick in inflation could be seen as modest rate cuts coming, but it will not surprise investors enough to consider the opposite scenario. On the contrary, a lower-than-anticipated outcome with easing services inflation should fuel hopes for more aggressive rate cuts and put the Pound Sterling under strong selling pressure.

Valeria Bednarik, FXStreet's Chief Analyst, notes: “The GBP/USD pair is heading into the event trading above the 1.3200 mark, and not far from the multi-month high at 1.3265 posted in August. Most of the pair’s strength is the result of the broad US Dollar’s weakness, as the Federal Reserve (Fed) is expected to deliver its first rate cut on Wednesday. The Fed’s event is likely to overshadow UK CPI release, as market players would wait until after the US central bank announcement to take positions.”

Technically speaking, Bednarik adds: “GBP/USD is bullish according to technical readings in the daily chart. A break through the aforementioned August high could lead to a quick test of the 1.3300 mark, while once beyond the latter, the rally can continue towards 1.3360. A daily close above the 1.3300 threshold would support the case for a steady advance in the days to come. On the other hand, the pair would need to slip below the 1.3140 region to put the bullish case at risk. In that case, the next level to watch and the potential bearish target comes at 1.3000.”

Inflation FAQs

What is inflation?

Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.

What is the Consumer Price Index (CPI)?

The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.

What is the impact of inflation on foreign exchange?

Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.

How does inflation influence the price of Gold?

Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it. Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.

Economic Indicator

Core Consumer Price Index (YoY)

The United Kingdom (UK) Core 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. The YoY reading compares prices in the reference month to a year earlier. Core CPI excludes the volatile components of food, energy, alcohol and tobacco. The Core CPI is a key indicator to measure inflation and changes in purchasing trends. 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.

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