- UK CPI is forecast to grow at a steady pace of 2.2% in the year to August.
- The Bank of England will announce its monetary policy decision on Thursday.
- The British Pound is technically bullish and could break the 1.3300 mark.
The UK’s Office for National Statistics (ONS) will publish the Consumer Price Index (CPI) figures for August 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 seen as a major driver of the British Pound (GBP).
The BoE met in August and decided to cut the benchmark interest rate by 25 basis points (bps) to 5%, a decision supported by a narrow majority of 5 out of 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?
UK CPI is expected to have risen at an annual rate of 2.2% in August, matching the figure for July. The core annual reading is forecast to be 3.5%, up from 3.3% previously. Finally, the monthly index is expected to rise 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 inflation levels could affect the decision of policymakers. Ahead of the announcement, financial markets anticipate that officials will keep rates unchanged before adopting a more aggressive stance from November. The central bank anticipated that inflation could reach 2.75% in the coming months before gradually declining and even falling below the 2% target in 2025.
Meanwhile, the BoE last week published a quarterly survey of the public’s inflation expectations, 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 outlook was raised, from 3.1% in May to 3.2%. The figures support the case for keeping rates unchanged, and so will the expected CPI result.
Finally, it is worth noting that the UK entered a technical recession in the last quarter of 2023. The economy has since recovered, but growth is slow and the risk of another downturn remains.
In such a scenario, a mild deviation from expected figures could have a limited impact on the British Pound. Higher-than-anticipated readings could dampen hopes for aggressive rate cuts, but the path is clear. The BoE will cut interest rates and there is no scope for hikes. What’s more, market participants do not expect the BoE to 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 publish August CPI figures on Wednesday at 06:00 GMT. Before we look at the possible scenarios, there is one more thing to consider: Even though headline inflation is hovering around the central bank’s target, services inflation has remained fairly high and above 5% for most of the year, more than double the headline rate.
As stated, a modest rise in inflation could be seen as modest rate cuts, but it will not surprise investors enough to consider the opposite scenario. Conversely, a lower than anticipated outcome with declining services inflation should fuel hopes for more aggressive rate cuts and put the British Pound under strong selling pressure.
Valeria Bednarik, Chief Analyst at FXStreet, notes: “The GBP/USD pair heads into the event trading above the 1.3200 mark, and not far from the multi-month high of 1.3265 recorded in August. Most of the pair’s strength is a result of the broad-based weakness of the US Dollar, as the Federal Reserve (Fed) is expected to deliver its first rate cut on Wednesday. The Fed event will likely overshadow the UK CPI release, as market participants would wait until after the US central bank’s announcement to take positions.”
Technically speaking, Bednarik adds: “GBP/USD is bullish according to technical readings on the daily chart. A break of 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 coming days. On the other hand, the pair would need to slide below the 1.3140 region to put the bullish case at risk. In that case, the next level to watch and potential bearish target lies at 1.3000.”
BoE FAQs
The Bank of England (BoE) decides the monetary policy of the United Kingdom. Its main objective is to achieve price stability, i.e. a constant inflation rate of 2%. Its instrument for achieving this is the adjustment of base lending rates. The BoE sets the rate at which it lends to commercial banks and at which banks lend to each other, determining the level of interest rates in the wider economy. This also influences the value of the British Pound (GBP).
When inflation exceeds the Bank of England’s target, the Bank of England responds by raising interest rates, making it more expensive for citizens and businesses to access credit. This is positive for the British Pound, as higher interest rates make the UK a more attractive place for global investors to invest their money. When inflation falls below target, it is a sign that economic growth is slowing, and the Bank of England will consider lowering interest rates to make credit cheaper in the hope that businesses will borrow to invest in growth-generating projects, which is negative for the British Pound.
In extreme situations, the Bank of England may implement a policy called Quantitative Easing (QE). QE is the process by which the BoE substantially increases the flow of credit into a jammed financial system. QE is a policy of last resort when lowering interest rates fails to achieve the required result. The process of QE involves the Bank of England printing money to buy assets, usually AAA-rated government or corporate bonds, from banks and other financial institutions. QE often results in a weakening of the British Pound.
Quantitative tightening (QT) is the reverse of QE, and is applied when the economy is strengthening and inflation is starting to rise. Whereas in QE the Bank of England (BoE) buys government and corporate bonds from financial institutions to encourage them to lend, in QT the BoE stops buying more bonds and stops reinvesting the maturing principal of bonds it already holds. This is generally positive for the British Pound.
Economic indicator
Consumer Price Index (YoY)
The CPI publishes it National Statistics and measures the change in prices of a basket of goods and services purchased by households for consumption. The CPI is the main indicator for measuring inflation and changes in consumer trends. A reading higher than expectations is bullish for the pound, while a reading lower than expectations is bearish.
Next post:
Wed Sep 18, 2024 06:00
Frequency:
Monthly
Dear:
2.2%
Previous:
2.2%
Fountain:
Office for National Statistics
The Bank of England is tasked with keeping inflation, as measured by the headline Consumer Price Index (CPI), at around 2%, which gives the monthly release its importance. A rise in inflation implies ever-faster interest rate increases or a reduction in bond buying by the BOE, which means squeezing the supply of pounds. Conversely, a fall in the pace of price increases signals looser monetary policy. A higher-than-expected outcome tends to be bullish for the GBP.
Source: Fx Street
I am Joshua Winder, a senior-level journalist and editor at World Stock Market. I specialize in covering news related to the stock market and economic trends. With more than 8 years of experience in this field, I have become an expert in financial reporting.
