UK inflation ticks up to 3.8% YoY in July vs. 3.7% expected
- The United Kingdom’s annual CPI rose 3.8% in July vs. 3.7% estimated.
- British inflation declined to 0.1% MoM in July vs. a -0.1% forecast.
- GBP/USD jumps to test 1.3500 after UK CPI inflation data.
The United Kingdom (UK) headline Consumer Price Index (CPI) rose at an annual rate of 3.8% in July after having increased by 3.6% in June, the data released by the Office for National Statistics (ONS) showed on Wednesday.
The market consensus was for a 3.7% growth in the reported period. The reading moves further away from the Bank of England’s (BoE) 2% inflation target.
The core CPI (excluding volatile food and energy items) rose 3.8% year-over-year (YoY) in the same period, compared to a 3.7% advance in June while beating the expected 3.7% print.
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This section below was published at 02:15 GMT as a preview of the UK Consumer Price Index (CPI) inflation data.
- The United Kingdom’s Office for National Statistics will publish the July CPI data on Wednesday.
- Inflation, as measured by the CPI, is forecast to rise further above the BoE’s goal in July.
- The GBP/USD is going through a mild bearish correction ahead of the release.
The United Kingdom (UK) June Consumer Price Index (CPI) is scheduled for release on Wednesday at 06:00 GMT. The report, released by the Office for National Statistics (ONS), is closely watched amid the potential impact of inflation data on the Bank of England (BoE) monetary policy decisions.
Inflation in the UK, as measured by the CPI, is forecast to have contracted by 0.1% in July, although the annual figure is seen accelerating to 3.7% from 3.6% in June and 3.4% in May. The core CPI, on the other hand, is expected to have grown at an annual 3.7% rate, unchanged from the previous month.
What to expect from the next UK inflation report?
Consumer prices have been accelerating steadily over the last 11 months after bottoming with a 1.7% yearly inflation in September. Headline inflation is seen reaching its highest level in nearly two years, if the market consensus is met, pushing the yearly CPI to levels nearly twice the Bank of England’s (BoE) 2% target for price stability.
The BoE cut rates by 25 basis points to 4% in a dramatic meeting on August 7, which needed two rounds of voting for the first time in its 300 years of history, with some policymakers showing concerns about rising inflationary pressure. In this context, and with the bank’s forecasts pointing to a 4% yearly inflation in September, these numbers will only strengthen the hawks’ side, casting doubt about further rate cuts.
Later data have provided further reasons for a more hawkish policy stance. Preliminary Gross Domestic Product showed above-expectations growth in the second quarter, and unemployment claimants declined against expectations, which points to a resilient economy and strengthens the case for a more hawkish BoE stance.
Down to the GBP/USD pair, ING analyst Chris Turner sees UK inflation figures likely to support the Pound: “Some sticky UK inflation for July looks unlikely to alter the market’s view of the BoE over the coming days. This should keep GBP/USD bid this week, where a break of 1.3585/3600 could see 1.3680/3700 by the end of the week.”
How will the UK Consumer Price Index report affect GBP/USD?
Against this background, the risk is of a higher-than-expected UK CPI reading that would practically discard any further BoE rate cut in the coming months. This would highlight a positive monetary divergence with the Federal Reserve (Fed), which is expected to ease its monetary policy in September, and underpin demand for the Sterling.
A soft inflation reading, on the contrary, would keep hopes of at least one rate cut in 2025 alive, which might help the pair to extend its current corrective reaction.
The GBP/USD has been pulling back from multi-week highs heading into the CPI release, in a mild bearish correction after having rallied nearly 3% from August 1 lows. A combination of strong UK data and downbeat US figures, which have boosted expectations for Fed easing, fuelled Cable’s uptrend.
Pablo Piovano, senior analyst at FXStreet, sees the pair likely to resume its broader bullish trend in the near-term: “GBP/USD is expected to meet its next up barrier at its August top at 1.3594 (August 14). The surpassing of that level would pave the way for Cable to confront the weekly peak at 1.3588 (July 24), ahead of its 2025 ceiling at 1.3788 (July 1).
On the downside, Piovano points to the support area at 1.3385: “There is an interim support at the 100-day SMA at 1.3386, seconded by the August base of 1.3141 (August 1), which is closely followed by the May floor at 1.3139 (May 12). A breach below the latter would shift focus to the psychological 1.3000 threshold.
Inflation FAQs
Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.
The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.
Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.
Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it.
Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.