The United Kingdom’s Consumer Price Index (CPI) increased by 2.2% annually in July, a rise from the 2.0% recorded in June, according to data released by the Office for National Statistics (ONS) on Wednesday. This figure fell short of market expectations, which had forecasted a 2.3% increase, moving above the Bank of England‘s (BoE) target of 2.0%.
Core CPI, which excludes volatile food and energy prices, grew by 3.3% year-over-year in July, down from a 3.5% rise in June and below the anticipated 3.4%.
Services CPI inflation saw a significant drop to 5.2% year-over-year in July from June’s 5.7%, although it remained above the 5.0% threshold.
On a month-to-month basis, the UK CPI fell by 0.2% in July, a reversal from the 0.1% increase recorded in June.
Impact on GBP/USD
The CPI data led to a decline in the Pound Sterling, with the GBP/USD pair falling toward 1.2800. As of the latest update, the pair was trading 0.23% lower at approximately 1.2825.
Outlook for Future UK Inflation Reports
The upcoming CPI report was expected to show a 2.3% annual increase for July, slightly above the BoE’s target of 2%. Core inflation was projected to be 3.4%, down from June’s 3.5%. These figures align with the central bank‘s recent expectations, as expressed in their latest meeting.
The BoE recently reduced the Bank Rate by 25 basis points to 5% at the end of July, following two months where CPI inflation met the central bank’s target at 2%. The Monetary Policy Committee (MPC) anticipated an increase in CPI inflation to around 2.75% in the latter half of the year due to base effects from last year’s energy price declines and persistent domestic inflationary pressures.
The MPC also noted risks related to internationally traded goods prices that could affect the UK inflation outlook. Despite these risks, the central bank does not foresee an immediate interest rate hike or cut, maintaining a restrictive monetary policy until inflation trends closer to the 2% target.
Market Reactions and Technical Analysis
The release of UK CPI data is expected to impact GBP/USD dynamics. A higher-than-expected inflation figure could lead to speculation about a more hawkish BoE and a potential delay in interest rate cuts, possibly strengthening the Pound. Conversely, a lower-than-anticipated result might boost expectations for a rate cut, putting downward pressure on the Pound.
FXStreet’s Chief Analyst, Valeria Bednarik, suggests that GBP/USD fluctuations are currently centered around the 1.2800 mark. A significant drop below 2% in annual CPI could drive the pair toward 1.2664. However, a reading above 2.5% might push GBP/USD toward the 1.2900 region.
Technically, Bednarik notes that the bullish potential for GBP/USD appears limited, with the pair trading below a bearish 20 Simple Moving Average (SMA) and facing resistance around 1.2830. The 100 and 200 SMAs are currently neutral, indicating a lack of strong buying interest to drive sustained upward momentum.
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