• The Office for National Statistics will release the critical UK CPI report on Wednesday.
• Headline and Core annual inflation are set to fall in October, finally below the 6.0% level.
• The BoE’s interest rate outlook and the Pound Sterling’s fate hinges on the UK CPI data.

The Pound Sterling market keenly awaits the release of the high-impact United Kingdom’s (UK) Consumer Price Index (CPI) data for October, which will be released by the Office for National Statistics (ONS) on Wednesday.

Back in September, the UK CPI rose at an annual pace of 6.7% in September, at the same pace as seen in August. The data beat market expectations of a 6.5% rise. The Core CPI index (excluding volatile food and energy items) accelerated by 6.1% YoY in the reported month against an increase of 6.2% seen in August, surpassing the 6.0% forecast.

Despite the persistently high inflation level, the Bank of England (BoE) held the benchmark interest rate at a 15-year high of 5.25% at its November policy meeting, leaving the door open for another interest rate hike. The BoE tweaked the language in its policy statement by saying, “the Monetary Policy Committee’s (MPC) latest projections indicate that monetary policy is likely to need to be restrictive for an extended period of time.”

Last week, BoE Chief Economist Huw Pill reinforced the message that “maintaining a restrictive stance of monetary policy [is] key to meeting the inflation target.”

Meanwhile, the Bank’s updated forecasts showed that the British economy would be flatlining in the coming years. The BoE forecasts also showed that inflation was expected to fall to 4.8% in October, almost two full points lower than in September. The UK central bank said that the expected decline in inflation could be due to the slowdown in the economy and the fading impact of last year’s gas price surge, implying that inflation is set to resume its downward momentum soon.

Ahead of Wednesday’s inflation data, Pound Sterling traders digest the latest wage inflation data, which showed that Average Earnings excluding Bonus in the UK rose 7.7% 3M YoY in September, as against a 7.8% increase registered in August. 

However, the UK pay growth data is unlikely to have any significant impact on the BoE’s policy outlook. The BoE acknowledged in its November policy statement that there were “increasing uncertainties” about official data on the labor market, which has been hampered by low survey response rates.

“But jobs growth was likely to have been weaker than it previously thought and the worryingly strong growth in wages was expected to cool off,” the statement said.

Meanwhile, “Bank of England tightening expectations have evaporated. World Interest Rate Probability (WIRP), a gauge by Bloomberg, now suggests 10% odds of a hike on December 14, rising modestly to top out near 20% for February 1. The first cut is largely priced in for August 1,” analysts at BBH noted