What to expect from the next UK inflation report?

The headline annual UK Consumer Price Index is seen rising 3.6% in February, slowing from a 4.0% increase registered in January. The reading would be at its lowest since September 2021 but still much above the BoE’s 2.0% target.

The Core CPI inflation is set to fall to 4.6% YoY in February after reporting a 5.1% growth in January. Meanwhile, the British monthly CPI is likely to rebound 0.7%, following January’s 0.6% drop.

Despite the UK economy tipping into a technical recession at the end of 2023, the BoE’s brighter economic outlook for this year has dissuaded it from leaning towards a dovish pivot.

At its February policy meeting, the BoE maintained the key rate at 5.25%. Governor Andrew Bailey remained non-committal on what will be the Bank’s next interest rate moves in the upcoming meetings. However, he said that "we need to keep policy sufficiently restrictive for sufficiently long, nothing more, nothing less,” depending on the incoming data.

The policy statement said that the “BoE sees upward risks to CPI from geopolitical factors including the Red Sea, while domestic price and wage risks now "more evenly balanced."

While testifying before the UK Treasury Select Committee (TSC) last month, Bailey explained that “we are looking beyond the temporary period when we expect CPI to return to target this year," adding that he is looking for more sustained progress on the reduction of more persistent elements of inflation.

Therefore, the details of the CPI report, including food prices and the sticky services inflation, will grab markets’ attention in the run-up to the BoE policy announcements.

Previewing the UK inflation data, analysts at TD Securities (TDS) noted that “inflation likely took a decent step down across the board in Feb, largely on the back of base effects. Restaurant prices are the main risk to this print due to uncertainty around the scope for a rebound after sales weighed on prices in Jan.”

“Services remain the key focus for the MPC, and here we look for the y/y rate to come down to 6.0% y/y (BoE: 6.1%),” the TDS analysts said.

When will the UK Consumer Price Index report be released and how could it affect GBP/USD?

The UK CPI data is due for release on Wednesday at 07:00 GMT. The Pound Sterling has been losing ground against the US Dollar in the lead-up to the United Kingdom’s inflation showdown. The US Dollar stays supported at one-week highs ahead of Wednesday’s US Federal Reserve (Fed) monetary policy decision.

A higher-than-expected headline and core inflation data could reverberate the BoE’s “higher rates for longer” view, providing a fresh lift to the Pound Sterling. In such a case, GBP/USD could stage an upswing toward the 1.2800 level. On the other hand, GBP/USD could resume its correction toward 1.2600 if the UK CPI data show a notable slowdown in inflationary pressures, as expectations of a second-quarter BoE rate cut could be back on the table.

Markets are pricing in the first BoE rate cut this year at the August 1 policy meeting.

Dhwani Mehta, Asian Session Lead Analyst at FXStreet, offers a brief technical outlook for the major and explains: “The GBP/USD pair is on a corrective decline from seven-month highs of 1.2893. The 14-day Relative Strength Index (RSI) has fallen below the midline, suggesting that the downside risks remain intact for the Pound Sterling.”

Dhwani adds: “A decisive break below the horizontal 50-day Simple Moving Average (SMA) at 1.2687 is needed to challenge the upward-pointing 100-day SMA of 1.2626. Further south, the 200-day SMA at 1.2595 could be retested. Alternatively, acceptance above the 1.2800 level on a daily closing basis is critical for GBP/USD to initiate a meaningful uptrend toward the multi-month high of 1.2893,” Dhwani adds