- 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 five-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.”
BoE FAQs
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).
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.
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.
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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