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    UK CPI Preview: Inflation expected to decline significantly in February, easing BoE concerns

    Source Fxstreet
    Mar 19, 2024 23:15
    • The Office for National Statistics will publish the UK CPI data for February on Wednesday.
    • United Kingdom’s headline and core annual inflation are likely to fall; monthly CPI is set to jump.
    • The UK CPI report could significantly impact the BoE’s interest rate outlook and the Pound Sterling.

    The United Kingdom’s (UK) Office for National Statistics (ONS) will publish the Consumer Price Index (CPI) data at 07:00 GMT on Wednesday, just a day before the Bank of England (BoE) monetary policy announcement.

    Pound Sterling traders will eagerly look forward to the UK CPI inflation report for fresh cues on whether the BoE will signal its first interest rate cut or retain its “higher rate for longer” stance.

    What to expect from the next UK inflation report?

    The headline annual UK Consumer Price Index is seen rising 3.6% in February, slowing from a 4.0% increase registered in January. The reading would be at its lowest since September 2021 but still much above the BoE’s 2.0% target.

    The Core CPI inflation is set to fall to 4.6% YoY in February after reporting a 5.1% growth in January. Meanwhile, the British monthly CPI is likely to rebound 0.7%, following January’s 0.6% drop.

    Despite the UK economy tipping into a technical recession at the end of 2023, the BoE’s brighter economic outlook for this year has dissuaded it from leaning towards a dovish pivot.

    At its February policy meeting, the BoE maintained the key rate at 5.25%. Governor Andrew Bailey remained non-committal on what will be the Bank’s next interest rate moves in the upcoming meetings. However, he said that "we need to keep policy sufficiently restrictive for sufficiently long, nothing more, nothing less,” depending on the incoming data.

    The policy statement said that the “BoE sees upward risks to CPI from geopolitical factors including the Red Sea, while domestic price and wage risks now "more evenly balanced."

    While testifying before the UK Treasury Select Committee (TSC) last month, Bailey explained that “we are looking beyond the temporary period when we expect CPI to return to target this year," adding that he is looking for more sustained progress on the reduction of more persistent elements of inflation.

    Therefore, the details of the CPI report, including food prices and the sticky services inflation, will grab markets’ attention in the run-up to the BoE policy announcements.

    Previewing the UK inflation data, analysts at TD Securities (TDS) noted that “inflation likely took a decent step down across the board in Feb, largely on the back of base effects. Restaurant prices are the main risk to this print due to uncertainty around the scope for a rebound after sales weighed on prices in Jan.”

    “Services remain the key focus for the MPC, and here we look for the y/y rate to come down to 6.0% y/y (BoE: 6.1%),” the TDS analysts said.

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

    The UK CPI data is due for release on Wednesday at 07:00 GMT. The Pound Sterling has been losing ground against the US Dollar in the lead-up to the United Kingdom’s inflation showdown. The US Dollar stays supported at one-week highs ahead of Wednesday’s US Federal Reserve (Fed) monetary policy decision.

    A higher-than-expected headline and core inflation data could reverberate the BoE’s “higher rates for longer” view, providing a fresh lift to the Pound Sterling. In such a case, GBP/USD could stage an upswing toward the 1.2800 level. On the other hand, GBP/USD could resume its correction toward 1.2600 if the UK CPI data show a notable slowdown in inflationary pressures, as expectations of a second-quarter BoE rate cut could be back on the table.

    Markets are pricing in the first BoE rate cut this year at the August 1 policy meeting.

    Dhwani Mehta, Asian Session Lead Analyst at FXStreet, offers a brief technical outlook for the major and explains: “The GBP/USD pair is on a corrective decline from seven-month highs of 1.2893. The 14-day Relative Strength Index (RSI) has fallen below the midline, suggesting that the downside risks remain intact for the Pound Sterling.”

    Dhwani adds: “A decisive break below the horizontal 50-day Simple Moving Average (SMA) at 1.2687 is needed to challenge the upward-pointing 100-day SMA of 1.2626. Further south, the 200-day SMA at 1.2595 could be retested. Alternatively, acceptance above the 1.2800 level on a daily closing basis is critical for GBP/USD to initiate a meaningful uptrend toward the multi-month high of 1.2893,” Dhwani adds.

    Economic Indicator

    United Kingdom Consumer Price Index (YoY)

    The United Kingdom (UK) 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. It is the inflation measure used in the government’s target. The YoY reading compares prices in the reference month to a year earlier. Generally, a high reading is seen as bullish for the Pound Sterling (GBP), while a low reading is seen as bearish.

    Read more.

    Next release: 03/20/2024 07:00:00 GMT

    Frequency: Monthly

    Source: Office for National Statistics

    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.

     

    Inflation FAQs

    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%.

    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.

    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.

    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.

     

    Disclaimer: For information purposes only. Past performance is not indicative of future results.
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