The UK's Consumer Price Index (CPI) data for January is poised for release by the Office for National Statistics (ONS) this Wednesday at 07:00 GMT. The data is anticipated to reveal an uptick in both the headline and core CPI inflation. Analysts forecast a rise in the annual UK CPI to 2.8% in January, following a 2.5% increase in December. In contrast, the monthly CPI is expected to decline by 0.3%, reversing the previous month's growth of 0.3%. Service inflation is also projected to escalate to 5.2% in January, up from 4.4% in December.
The Bank of England (BoE) faces significant challenges as it navigates these inflation dynamics. The central bank has set a target of 3.9% year-on-year (YoY) for core inflation, excluding volatile items such as energy, food, alcohol, and tobacco prices. Core CPI is forecasted to climb to 3.6% YoY in January from December's 3.2%.
A hotter-than-expected inflation report could bolster expectations that the BoE will maintain its cautious approach to policy easing, potentially boosting the Pound Sterling's upward momentum. Conversely, a downside surprise in the inflation readings might rekindle speculation about aggressive BoE rate cuts, possibly leading to a correction in the GBP/USD exchange rate from recent highs.
The BoE recently lowered its benchmark policy rate by 25 basis points (bps) to 4.5% after unexpectedly cooler inflation figures for December. Governor Andrew Bailey has maintained a cautious stance on future rate cuts, emphasizing the anticipation of a sharp rebound in UK inflation due to early surveys of December airfares missing the typical seasonal increase.
“Inflation is set to rebound sharply after December airfares were surveyed early in the month and missed the usual seasonal bump. The Monetary Policy Committee (MPC) expects this too, and is looking for core inflation of 3.9% year-on-year (YoY), having set the bar quite high for upside inflation surprises in the next few months. Still, it'll make for uncomfortable reading even if some of the drivers are temporary.” – TD Securities analysts
The upcoming UK CPI report could significantly impact the Pound Sterling and have profound implications for the BoE's interest rate strategy amid rising inflation risks. Technical indicators suggest a bullish trend for the GBP/USD pair, with the 14-day Relative Strength Index (RSI) holding firm above 50. Additionally, the 21-day Simple Moving Average (SMA) is nearing a cross above the 50-day SMA from below, which could confirm a Bull Cross if it occurs on a daily closing basis.
“However, the pair needs acceptance above the 100-day SMA at 1.2665 to initiate a meaningful upside toward the 200-day SMA at 1.2788. Ahead of that level, the 1.2700 round level must be recovered. On the flip side, the immediate support is seen at the 21-day SMA and the 50-day SMA confluence at around 1.2460. Should the selling pressure intensify, the rising trendline support drawn from the January 13 low at 1.2357 will come to the buyers’ rescue.” – Dhwani Mehta, Asian Session Lead Analyst at FXStreet
The BoE's forthcoming decisions will hinge on whether underlying inflation pressures ease sufficiently to allow further rate cuts. Governor Bailey acknowledged this delicate balancing act:
“We must judge in future meetings whether underlying inflation pressures are easing enough to allow further cuts. We must proceed carefully,” – BoE Governor Andrew Bailey