• United Kingdom's annual CPI rose 3% in January vs. 2.8% expected.
  • British inflation declined to -0.1% MoM in January vs. -0.3% estimate.
  • GBP/USD holds above 1.2600 after UK CPI inflation data.

The United Kingdom (UK) Consumer Price Index (CPI) rose at an annual pace of 3% in January after December’s 2.5% increase, the data released by the Office for National Statistics (ONS) showed Wednesday. 

The market consensus was for a 2.8% growth in the reported period. The print remained well above the Bank of England’s (BoE) 2% target.

The core CPI (excluding volatile food and energy items) advanced 3.7% year-over-year (YoY) in the same period, compared to a 3.2% rise in December while aligning with the market expectations.

Services inflation climbed to 5% YoY in January versus 4.4% in December.

Meanwhile, the monthly UK CPI inflation fell to -0.1% in January from +0.3% in December. Markets estimated a -0.3% reading.

GBP/USD reaction to the UK CPI inflation data

The UK CPI data fails to move the needle around the Pound Sterling, keeping GBP/USD modestly flat above the 1.2600 level, as of writing.

British Pound PRICE Today

The table below shows the percentage change of British Pound (GBP) against listed major currencies today. British Pound was the strongest against the US Dollar.

  USD EUR GBP JPY CAD AUD NZD CHF
USD   -0.09% -0.09% -0.27% -0.04% -0.20% -0.38% -0.06%
EUR 0.09%   -0.00% -0.16% 0.04% -0.11% -0.29% 0.03%
GBP 0.09% 0.00%   -0.19% 0.05% -0.11% -0.29% 0.03%
JPY 0.27% 0.16% 0.19%   0.22% 0.06% -0.13% 0.20%
CAD 0.04% -0.04% -0.05% -0.22%   -0.16% -0.33% -0.02%
AUD 0.20% 0.11% 0.11% -0.06% 0.16%   -0.18% 0.14%
NZD 0.38% 0.29% 0.29% 0.13% 0.33% 0.18%   0.32%
CHF 0.06% -0.03% -0.03% -0.20% 0.02% -0.14% -0.32%  

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 British Pound from the left column and move along the horizontal line to the US Dollar, the percentage change displayed in the box will represent GBP (base)/USD (quote).

This section below was published at 03:15 GMT as a preview of the UK Consumer Price Index (CPI) inflation data.

  • United Kingdom’s Office for National Statistics will publish the January CPI data on Wednesday.
  • The annual UK headline and core CPI inflation are expected to increase in January.
  • The Pound Sterling braces for volatility on the UK CPI report data release amid a prudent BoE.

The high-impact Consumer Price Index (CPI) data from the United Kingdom (UK) for January will be published by the Office for National Statistics (ONS) on Wednesday at 07:00 GMT.

The Pound Sterling (GBP) could witness a big reaction to the UK CPI inflation report, which will likely have a strong bearing on the Bank of England’s (BoE) interest rate-cut path amid upside risks to inflation.

What to expect from the next UK inflation report?

The UK Consumer Price Index is expected to rise at an annual rate of 2.8% in January after increasing by 2.5% in December.

The reading is set to move further away from the BoE’s 2.0% target.

Core CPI inflation, which excludes energy, food, alcohol and tobacco prices, is forecast to climb to 3.7% YoY in January from December’s 3.2%.

According to a Bloomberg survey of economists, official data is expected to show that service inflation jumped to 5.2% in January after falling to 4.4% in December.

Meanwhile, the British monthly CPI is seen declining 0.3% in the same period, as against the previous growth of 0.3%.

Previewing the UK inflation data, TD Securities analysts noted: “Inflation is set to rebound sharply after December airfares were surveyed early in the month and missed the usual seasonal bump. The Monetary Policy Committee (MPC) expects this too, and is looking for core inflation of 3.9% year-on-year (YoY), having set the bar quite high for upside inflation surprises in the next few months. Still, it'll make for uncomfortable reading even if some of the drivers are temporary.” 

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

At its monetary policy meeting earlier this month, the BoE lowered the benchmark policy rate by 25 basis points (bps) to 4.5% after the UK annual headline and services inflation unexpectedly cooled in December.

However, BoE Governor Andrew Bailey maintained a cautious stance on future rate cuts, noting that "we must judge in future meetings whether underlying inflation pressures are easing enough to allow further cuts."

"We must proceed carefully,” he added.

Therefore, the January UK CPI data will be closely scrutinized for fresh hints on the BoE’s easing trajectory.

A hotter-than-expected headline and core inflation data will strengthen the expectations of the BoE’s prudent approach to policy easing, providing a fresh boost to the Pound Sterling uptrend. In this case, GBP/USD could target the 1.2700 round figure. On the other hand, a downside surprise in the inflation readings could rekindle bets for aggressive BoE rate cuts, fuelling a GBP/USD correction from over two-month highs.

Dhwani Mehta, Asian Session Lead Analyst at FXStreet, offers a brief technical outlook for the major and explains: “GBP/USD is challenging the key resistance near 1.2605 heading into the UK CPI data release, with the 14-day Relative Strength Index (RSI) momentum indicator in the daily chart holding firm above 50. The 21-day Simple Moving Average (SMA) is on the verge of crossing the 50-day SMA from below, which, if it occurs on a daily closing basis, will confirm a Bull Cross. These technical indicators point to a sustained uptrend for the pair.”

Mehta adds: “However, the pair needs acceptance above the 100-day SMA at 1.2665 to initiate a meaningful upside toward the 200-day SMA at 1.2788. Ahead of that level, the 1.2700 round level must be recovered. On the flip side, the immediate support is seen at the 21-day SMA and the 50-day SMA confluence at around 1.2460. Should the selling pressure intensify, the rising trendline support drawn from the January 13 low at 1.2357 will come to the buyers’ rescue.

Pound Sterling FAQs

The Pound Sterling (GBP) is the oldest currency in the world (886 AD) and the official currency of the United Kingdom. It is the fourth most traded unit for foreign exchange (FX) in the world, accounting for 12% of all transactions, averaging $630 billion a day, according to 2022 data. Its key trading pairs are GBP/USD, also known as ‘Cable’, which accounts for 11% of FX, GBP/JPY, or the ‘Dragon’ as it is known by traders (3%), and EUR/GBP (2%). The Pound Sterling is issued by the Bank of England (BoE).

The single most important factor influencing the value of the Pound Sterling is monetary policy decided by the Bank of England. The BoE bases its decisions on whether it has achieved its primary goal of “price stability” – a steady inflation rate of around 2%. Its primary tool for achieving this is the adjustment of interest rates. When inflation is too high, the BoE will try to rein it in by raising interest rates, making it more expensive for people and businesses to access credit. This is generally positive for GBP, as higher interest rates make the UK a more attractive place for global investors to park their money. When inflation falls too low it is a sign economic growth is slowing. In this scenario, the BoE will consider lowering interest rates to cheapen credit so businesses will borrow more to invest in growth-generating projects.

Data releases gauge the health of the economy and can impact the value of the Pound Sterling. Indicators such as GDP, Manufacturing and Services PMIs, and employment can all influence the direction of the GBP. A strong economy is good for Sterling. Not only does it attract more foreign investment but it may encourage the BoE to put up interest rates, which will directly strengthen GBP. Otherwise, if economic data is weak, the Pound Sterling is likely to fall.

Another significant data release for the Pound Sterling is the Trade Balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports over a given period. If a country produces highly sought-after exports, its currency will benefit purely from the extra demand created from foreign buyers seeking to purchase these goods. Therefore, a positive net Trade Balance strengthens a currency and vice versa for a negative balance.

 

Source: Fxstreet