20 Nov 2024

The Office for National Statistics (ONS) in the United Kingdom is scheduled to release the Consumer Price Index (CPI) report on Wednesday at 07:00 GMT.

In October, the annual headline CPI inflation in the UK is anticipated to increase, while the core inflation figure is expected to decrease slightly. This CPI data may indicate a pause in interest rate cuts by the Bank of England (BoE) in December, potentially leading to a decline in the value of the Pound Sterling.

The upcoming inflation report is projected to show a rise in the UK Consumer Price Index at an annual rate of 2.2% for October, following a 1.7% increase in September, thus surpassing the BoE's target of 2.0%.

Core CPI inflation is forecasted to ease to 3.1% year-over-year in October, down from 3.2% in September. A Bloomberg survey of economists suggests that service inflation is likely to have slightly decreased to 4.8% in October from 4.9% in the previous month.

The BoE had estimated the annual headline CPI to be 2.2% and the services CPI to be 5.0% for October. Additionally, the monthly CPI is expected to rise by 0.5% during the same period, in contrast to the previous reading of 0%.

In anticipation of the UK inflation data, analysts from Societe Generale commented that they expect base effects and increased utility prices to drive the headline inflation above the 2.0% target to 2.2% year-over-year in October, up from 1.7% in September. They also noted that services inflation is projected to rise by 0.1 percentage point to 5% year-over-year, although there are risks leaning towards a downward adjustment.

How will the UK Consumer Price Index report affect GBP/USD?

Following the November 7 decision to cut rates by 25 basis points (bps) to 4.75%, the BoE retained its cautious language on future interest rate cuts. In its policy statement, the central bank reiterated that it would need to stay "restrictive for sufficiently long" to return inflation sustainably to the 2.0% target.

The Bank of England (BoE) has forecasted that the Autumn Budget 2024, presented by UK Finance Minister Rachel Reeves, will contribute to an increase in the size of the GDP while simultaneously intensifying inflationary pressures.

During his testimony before the UK Parliament’s Treasury Select Committee (TSC) on Tuesday, Governor Andrew Bailey emphasized that the tax increases implemented by the Labour government support the central bank’s cautious strategy regarding interest rate reductions.

In this context, the UK Consumer Price Index (CPI) data will be crucial in determining whether the BoE will halt its easing strategy following its second rate cut since 2020 earlier this month.

If the headline and core inflation data exceed expectations, it could strengthen the case for a pause by the BoE, potentially boosting the Pound Sterling. In such a scenario, GBP/USD may begin a sustained recovery from its six-week lows. Conversely, if inflation figures fall short of expectations, it could further weaken the Pound Sterling, pushing GBP/USD down towards 1.2500.

Dhwani Mehta, Asian Session Lead Analyst at FXStreet, provides a concise technical analysis for the currency pair, stating: “GBP/USD remains in recovery mode as the UK CPI data release approaches. However, the 14-day Relative Strength Index (RSI) remains below 50, indicating that downside risks persist. Additionally, the 21-day Simple Moving Average (SMA) appears poised to intersect the 200-day SMA from above, signaling a potential Death Cross on the daily chart, which reinforces the bearish outlook.”

Dhwani further notes: “The pair may extend its recovery towards the psychological resistance level of 1.2750, and if surpassed, the 200-day SMA at 1.2820 will come into play. The next target for upward movement is identified at the 21-day SMA, currently at 1.2858. On the downside, immediate support is located at the multi-month low of 1.2597, below which the round number of 1.2500 could be tested.”