The United Kingdom’s Office for National Statistics (ONS) is set to release the highly anticipated Consumer Price Index (CPI) data for February at 07:00 GMT on Wednesday. The release is expected to trigger significant volatility in the Pound Sterling (GBP), as it could alter market expectations regarding the Bank of England‘s (BoE) future interest rate decisions.
What to Expect from the UK CPI Inflation Report?
The UK CPI is anticipated to show a 2.9% year-over-year (YoY) increase in February, slightly lower than the 3% growth recorded in January. The inflation figure is expected to remain above the BoE’s 2.0% target, indicating persistent inflationary pressures.
Core CPI, which excludes energy, food, alcohol, and tobacco, is forecast to dip slightly to 3.6% (YoY) in February, down from 3.7% in January. Additionally, service inflation is expected to ease to 4.9% after climbing to 5% in January, according to a Bloomberg survey of economists. On a monthly basis, UK CPI is predicted to rise by 0.5%, following a decline of 0.1% in the previous period.
TD Securities analysts predict inflation will cool slightly, with headline CPI falling to 2.8%, while core and service inflation are expected to drop to 3.6% and 4.9%, respectively. Despite these softer figures, analysts believe that the deceleration remains too slow for the Bank of England’s preference, maintaining pressure for cautious monetary policy.
Impact of UK Inflation Data on GBP/USD
Earlier this month, the BoE decided to hold interest rates at 4.5%, citing uncertainty in both the UK and global economies. This decision initially tempered expectations for rate cuts in the near future. However, the 8-1 vote split to maintain rates was considered hawkish, prompting a reassessment of UK rate expectations. The swaps market currently prices in 50 basis points of easing over the next 12 months, but it has removed any expectations of an additional 25-basis-point cut following the BoE’s less dovish vote.
An upside surprise in the headline or core inflation data would reinforce the BoE’s cautious stance and reduce the likelihood of aggressive rate cuts. In this case, the Pound could resume its uptrend, pushing GBP/USD back toward the 1.3050 mark. On the other hand, softer-than-expected inflation readings could ease concerns about the UK economy, reviving speculation for larger rate cuts and extending the GBP/USD correction from recent highs.
However, any immediate reaction to the CPI data may be short-lived, with traders likely to refocus on the upcoming British Spring Budget Statement, set to be released later on Wednesday.
Technical Outlook for GBP/USD
From a technical perspective, GBP/USD is holding above all major daily Simple Moving Averages (SMAs) ahead of the UK CPI data, with the 14-day Relative Strength Index (RSI) holding above 50. The recent Bull Cross between the 50-day and 100-day SMAs, confirmed on Monday, suggests continued bullish momentum.
For a sustained uptrend, GBP/USD needs to break and hold above the 1.3000 level. A move beyond this threshold could target the November 2024 high of 1.3048, with the next key resistance at the 1.3100 round figure. On the downside, immediate support is at the 21-day SMA near 1.2863. A break below this level could bring the critical 200-day SMA at 1.2800 into focus, and further weakness could lead to a test of the 1.2750 psychological support level.
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