The United Kingdom’s Consumer Price Index (CPI) data for January will be released by the Office for National Statistics (ONS) on Wednesday at 07:00 GMT. The report is expected to have a significant impact on the Pound Sterling (GBP) as investors assess its implications for the Bank of England’s (BoE) interest rate policy.
Inflation Expectations and Market Forecasts
Analysts anticipate a rise in the UK’s annual CPI to 2.8% in January, up from 2.5% in December, further distancing itself from the BoE’s 2.0% target. The core CPI, which excludes volatile components such as energy and food, is projected to accelerate to 3.7% year-on-year (YoY), compared to 3.2% in December.
A Bloomberg survey suggests service inflation could jump to 5.2%, rebounding from December’s 4.4% decline. Meanwhile, the monthly CPI is expected to contract by 0.3%, reversing the previous month’s 0.3% increase.
Economists at TD Securities noted that inflation is likely to rebound sharply, partly due to seasonal factors, such as airfares missing their usual December surge. The BoE’s Monetary Policy Committee (MPC) anticipates core inflation to reach 3.9% YoY, signaling a high threshold for inflation surprises.
Impact on BoE Policy and GBP/USD Outlook
The BoE recently reduced its benchmark interest rate by 25 basis points (bps) to 4.5%, citing a cooling in inflationary pressures in December. However, Governor Andrew Bailey has urged caution, stating that future rate cuts will depend on whether underlying inflation pressures ease sufficiently.
January’s CPI data will play a crucial role in shaping expectations for the BoE’s monetary policy trajectory. A stronger-than-expected inflation report could bolster the GBP by reinforcing expectations of a slower pace of rate cuts, potentially driving GBP/USD toward 1.2700. Conversely, weaker inflation figures could fuel speculation about more aggressive rate reductions, leading to a decline in GBP/USD.
Technical Analysis: GBP/USD Poised for Further Gains?
Dhwani Mehta, FXStreet’s Asian Session Lead Analyst, highlights that GBP/USD is testing key resistance near 1.2605 ahead of the CPI release, with the 14-day Relative Strength Index (RSI) holding firm above 50. A bullish crossover of the 21-day Simple Moving Average (SMA) above the 50-day SMA could confirm a sustained uptrend.
For further gains, GBP/USD must secure a daily close above the 100-day SMA at 1.2665, paving the way for a potential rally toward the 200-day SMA at 1.2788. However, downside risks remain, with immediate support at 1.2460 and further protection at the rising trendline near 1.2357.
As markets await the CPI data, traders will closely monitor its impact on BoE rate expectations and GBP/USD movements in the days ahead.
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