UK CPI is expected to grow at faster pace in August, endorsing BoE hawks

• The United Kingdom’s Office for National Statistics will publish the August CPI data on Wednesday.

• The annual UK headline inflation is set to rise in August, while growth in core CPI is seen cooling down.

• The UK CPI data could rock the Pound Sterling amid the expected BoE interest rate cut pause on Thursday.

The United Kingdom (UK) Office for National Statistics (ONS) will publish the high-impact Consumer Price Index (CPI) data for August on Wednesday at 06:00 GMT.

The UK CPI inflation report could significantly impact the direction of the Bank of England’s (BoE) interest rate move and the Pound Sterling (GBP) just ahead of Thursday’s Bank of England (BoE) meeting to decide on interest rates.

What to expect from the next UK inflation report?

The UK Consumer Price Index is forecast to rise 3.9% year-over-year (YoY) in August, following a 3.8% increase in July.

While the reading is set to meet the BoE’s projection, it will also come in almost double its 2.0% target.

Core CPI inflation, which excludes energy, food, alcohol, and tobacco prices, is expected to fall to 3.6% YoY in August from 3.8% in July.

According to a Bloomberg survey of economists, official data is expected to show that service inflation remained elevated well above the BoE’s 2% target, seen at 4.8% YoY in August vs. 5.0% in July.

Meanwhile, the British monthly CPI is expected to rise by 0.3% in the same period, after having increased by 0.1% in July.

“We expect a mixed CPI print, with core coming in below consensus, but in line with Monetary Policy Report (MPR) projections; and headline at 3.9% YoY to be a tick above both market and BoE forecasts,“ TD Securities analysts said in a research note ahead of the data release. 

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

The expected slight uptick in British inflation and a cooling labor market could dictate the BoE’s path forward on interest rates beyond the anticipated September pause.

The latest labor data published by the Office for National Statistics showed annual growth in regular earnings, excluding bonuses, slowed to 4.8% in the three months to July from 5% previously, while the Unemployment Rate remained unchanged at 4.7%, both readings matching the analysts’ estimates.

Meanwhile, a strong majority of the economists polled by Reuters pencilled in a 25-basis-point cut next quarter, with increased bets for a rate reduction in November. 

At its August monetary policy meeting, the BoE lowered the benchmark rate to 4%, but after an unprecedented second round of voting that ended with a 5-4 split in favor of such a move.

The central bank repeated its guidance about "a gradual and careful approach" to further cuts in borrowing costs but added that "the restrictiveness of monetary policy had fallen as Bank Rate had been reduced.”

Therefore, a hotter-than-expected headline inflation data would pour cold water on expectations of any rate cuts this year. In such a case, the Pound Sterling will receive the much-needed boost, driving GBP/USD toward the 1.3700 barrier. Conversely, an unexpected slowdown in annual CPI could ramp up the odds of a November rate cut, which could weigh heavily on the pair.

Dhwani Mehta, Asian Session Lead Analyst at FXStreet, offers a brief technical outlook for the major and explains: “GBP/USD is sitting at the highest level in two months above 1.3600, with the 14-day Relative Strength Index (RSI) momentum indicator pointing north above the 50 level.”

“The pair needs acceptance above the 1.3650 psychological barrier to extend the uptrend toward the 1.3700 threshold. The next topside target is aligned at the July high of 1.3789. Conversely, the immediate support is seen at around the 1.3550 level, below which the 21-day Simple Moving Average (SMA) at 1.3506 could be challenged. Further down, the last line of defense for buyers is seen at the confluence zone of the 50-day SMA and the 100-day SMA at around 1.3470,” Dhwani adds.