UK inflation to stick at high levels despite headline CPI numbers expected to fall
- The Office for National Statistics is due to publish the UK inflation data on Wednesday.
- Core annual inflation is seen sticky at 7.1%, headline figure set to fall further.
- The UK CPI data could cement a 50 bps BoE August rate hike and fuel a Pound Sterling rally.
The all-important Consumer Price Index (CPI) data from the United Kingdom (UK) will be published on Wednesday, July 19. Amid mounting wage and inflationary pressures in the UK, the country’s CPI release is likely to significantly impact the Bank of England (BoE) rate hike outlook, in turn, influencing the near-term direction in the GBP/USD pair.
After presenting the central bank’s half-yearly Financial Stability Report last Wednesday, BoE Governor Andrew Bailey said that “the UK economy and financial system has so far been resilient to interest rate risk.” Bailey repeated his view that the current rate of pay growth was not consistent with the BoE’s 2% inflation target. His comments came after the UK labor market report showed that the Unemployment Rate ticked higher to 4.0% in three months to May while the wage growth hit a record high of 7.3% 3M YoY to May.
Hot wage inflation data strengthened the case for aggressive tightening by the BoE in the upcoming months, with the peak rate seen near 6.25%. That said, all eyes now remain on the June UK inflation report, which could cement expectations of a 50 basis points (bps) rate increase by the Bank of England next month.
What to expect in the next UK inflation report?
Economists are expecting the headline annual UK Consumer Price Index inflation to fall to 8.2% in June, compared with the 8.7% print reported in May. The Core CPI is expected to rise 7.1% YoY in June, at the same pace seen in May. On a monthly basis, Britain’s CPI inflation is likely to increase 0.4% in June, slowing from a 0.7% growth booked in May.
Analysts at BBH noted, “UK data highlight will be June CPI Wednesday. Headline is expected at 8.2% y/y vs. 8.7% in May, core is expected to remain steady at 7.1% y/y, and CPIH is expected at 7.5% y/y vs. 7.9% in May. If so, the headline would be the lowest since March 2022 but still well above the 2% target.”
“WIRP suggests another 50 bp hike is largely priced August 3, followed by 25 bp hikes September 21, November 2, and December 14 that would see the bank rate peak near 6.25%,” the analysts added.
When will the UK Consumer Price Index report be released and how could it affect GBP/USD?
The UK CPI data will be released at 06:00 GMT this Wednesday. Heading into the highly-anticipated inflation release from the United Kingdom, the Pound Sterling (GBP) is struggling below the 1.3100 round level against the US Dollar, holding its corrective mode after setting 15-month highs at 1.3146 last Friday. Increased bets for aggressive BoE tightening as against the dovish Fed interest rates outlook are likely to keep the correction limited in the GBP/USD pair.
The hotter-than-expected headline and core inflation data are likely to trigger a fresh upswing in the Pound Sterling, lifting the odds for a 50 bps rate hike by the BoE in August. GBP/USD could resume its uptrend toward 1.3200. Alternatively, should the core inflation data miss market expectations, GBP/USD will likely extend its correction toward the 1.2850 key support.
Meanwhile, Dhwani Mehta, Asian Session Lead Analyst at FXStreet, offers a brief technical outlook for the major and explains: “The 14-day Relative Strength Index (RSI) has moved out of the overbought territory, suggesting that a fresh uptrend in the GBP/USD pair could be in the offing. Therefore, the UK inflation data holds the key for the near-term direction in the currency pair.
Dhwani also outlines important technical levels to trade the GBP/USD pair: “The major needs acceptance above the 1.3100 level to resume the previous uptrend. The next relevant hurdle for Pound Sterling buyers is seen at the multi-month high of 1.3146. On the downside, immediate support awaits at the 1.3000 round level, below which sellers could target the July 13 low at 1.2984. The additional correction will expose the 1.2950 psychological level.”
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.