The United Kingdom’s inflation rates are expected to go down dramatically in February, based on the last data forecasts. That said, some analysts are expecting a small dip in the Consumer Price Index (CPI), as well as the core CPI. Their projections put headline inflation at 2.8% and core inflation at 3.6% on an annual basis. The Bank of England (BoE) looks set to stay on hold at 4.5%. This decision comes despite the fact that their target inflation rate of 2.0% seems very far away right now. The UK's Office for National Statistics (ONS) is scheduled to release the CPI data on Wednesday at 07:00 GMT, which could potentially influence the direction of the Pound Sterling and future interest rates.
Inflation Forecast and Economic Implications
On a year-over-year basis, according to official estimates, the UK Consumer Price Index will increase 2.9% in February. This is an indication of inflation decelerating a bit, but it’s still above the Bank of England’s liked inflation levels. Core CPI inflation, which excludes more volatile items such as energy, food, alcohol and tobacco, is predicted to remain flat at 3.6% YoY. Service inflation is expected to moderate a bit to 4.9% YoY.
"Inflation is slated to cool slightly, with headline dropping to 2.8% (consensus: 2.9%; prior: 3.0%). We also expect core and services to come in lower, at 3.6% YoY (prior: 3.7% YoY) and 4.9% YoY (prior: 5.0% YoY), respectively. While all these numbers are softer than in Jan, the deceleration remains too slow for the Monetary Policy Committee’s (MPC) preferences." – TD Securities analysts
Members of the Bank of England’s Monetary Policy Committee have expressed a desire to see inflation come down faster. They think it’s not going fast enough for what they want. Adding to the economic fog, the British monthly CPI is predicted to increase 0.5% in February.
Impact on Monetary Policy and Currency Markets
The BoE’s move to maintain interest rates at 4.5% illustrates a dovish tone given recent economic uncertainty. The central bank's target of a 2.0% inflation rate remains out of reach for now, keeping pressure on policymakers to consider future actions carefully.
The swaps market is aggressively pricing in at least 50 bp worth of easing over the next year. Changes in the marketplace have taken any possibility of cuts – immediate or otherwise – off the table.
"However, the 8-1 vote split to stay on hold was a hawkish surprise and triggered an upward adjustment to UK rate expectations." – BBH analysts
These monetary policy decisions and expectations are rather tightly bound together with currency market movements, especially with regard to the Pound Sterling’s current trajectory.
Sterling's Prospects Amid Inflation Data Release
Financial analysts have all eyes on the upcoming UK CPI data release. They’re especially concerned with the performance of the Pound Sterling against other major currencies, like the US Dollar. On the chart, the GBP/USD pair is holding above 21-, 55-, and 200-day daily Simple Moving Averages, reaffirming bullish tendency going into CPI release.
"GBP/USD is holding above all major daily Simple Moving Averages (SMA) heading into the UK CPI showdown, with the 14-day Relative Strength Index (RSI) momentum indicator in the daily chart holding firm above 50. The 50-day SMA and the 100-day SMA Bull Cross, confirmed on Monday, remains in play and acts as a tailwind for the pair." – Dhwani Mehta, Asian Session Lead Analyst at FXStreet
The markets could be in for a bumpy ride depending on whether the return on inflation matches expected inflation. Technical analysts suggest that breaking through various resistance levels would indicate bullish trends for the currency pair.
"However, the pair needs acceptance above the 1.3000 threshold to initiate a sustained uptrend toward the November 2024 high of 1.3048. The next relevant resistance is aligned at the 1.3100 round level." – Dhwani Mehta, Asian Session Lead Analyst at FXStreet