15 Jan 2025

The Office for National Statistics in the United Kingdom is scheduled to publish the Consumer Price Index (CPI) data for December on Wednesday.

It is anticipated that the annual headline CPI inflation in the UK will increase in December, while the core inflation figure is expected to show a slight decrease.

The forthcoming CPI report is likely to have a significant impact on the Pound Sterling, particularly in light of the Bank of England's cautious stance on monetary policy.

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

The report on UK CPI inflation may have a considerable effect on the trajectory of the Bank of England's (BoE) interest rates and the value of the Pound Sterling (GBP), particularly in light of the ongoing volatility in the global bond market.

The UK Consumer Price Index is projected to rise by 2.7% year-over-year (YoY) in December, an increase from the 2.6% recorded in November, thereby moving further away from the Bank of England's (BoE) target of 2.0%.

Core CPI inflation, which excludes categories such as energy, food, alcohol, and tobacco, is anticipated to decrease slightly to 3.4% YoY in December, down from the 3.5% reported in November.

A Bloomberg survey of economists indicates that official statistics are expected to reveal a decline in service inflation to 4.8% in December, following a steady rate of 5% in the previous month.

The BoE has projected the annual headline CPI to be 2.5% and the services CPI to be 4.7% for December.

Additionally, the British monthly CPI is expected to increase by 0.4% during the same period, compared to a previous growth of 0.1%.

Previewing the UK inflation data, TD Securities analysts noted: “We look for the headline of 2.7% but the more important core and services are likely to see decelerations, especially services, which we expect to fall from 5.0% YoY in November. That said, there remains big uncertainty about airfares, which were likely very weak in the month on account of the survey data.”

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

The UK Consumer Price Index is projected to rise by 2.7% year-over-year (YoY) in December, an increase from the 2.6% recorded in November, thereby moving further away from the Bank of England's (BoE) target of 2.0%.

Core CPI inflation, which excludes categories such as energy, food, alcohol, and tobacco, is anticipated to decrease slightly to 3.4% YoY in December, down from the 3.5% reported in November.

A Bloomberg survey of economists indicates that official statistics are expected to reveal a decline in service inflation to 4.8% in December, following a steady rate of 5% in the previous month.

The BoE has projected the annual headline CPI to be 2.5% and the services CPI to be 4.7% for December.

Additionally, the British monthly CPI is expected to increase by 0.4% during the same period, compared to a previous growth of 0.1%.

Previewing the UK inflation data, TD Securities analysts noted: “We look for the headline of 2.7% but the more important core and services are likely to see decelerations, especially services, which we expect to fall from 5.0% YoY in November. That said, there remains big uncertainty about airfares, which were likely very weak in the month on account of the survey data.”

The Bank of England (BoE) concluded 2024 by deciding to maintain the benchmark policy rate at 4.75% during its December meeting, following a rise in UK inflation to an eight-month peak. The voting dynamics reflected a more divided stance than anticipated, with three members of the Monetary Policy Committee (MPC) advocating for a rate reduction, while six preferred to keep the rate unchanged. In light of the subdued economic outlook, BoE Governor Andrew Bailey remarked, “We believe that a gradual approach to future interest rate reductions is appropriate. However, due to the increased uncertainty surrounding the economy, we cannot specify when or by how much we will adjust rates in the upcoming year.”

The persistent decline in the UK bond market underscores the grim economic forecast and rising inflationary pressures during the era of US President-elect Donald Trump 2.0. Given these circumstances, the upcoming release of the December UK Consumer Price Index (CPI) data carries significant implications, as it may influence market expectations regarding the BoE's future interest rate trajectory.

Should the headline and core inflation figures exceed expectations, it is likely to reinforce the BoE's gradual easing approach, offering much-needed support to the Pound Sterling. In such a scenario, GBP/USD could experience a notable recovery from its lowest levels in over a year. Conversely, if inflation data falls short of expectations, it may prompt the BoE to consider more aggressive rate cuts in light of the fragile economic environment, potentially driving GBP/USD below the 1.2000 mark.

Dhwani Mehta, Asian Session Lead Analyst at FXStreet, provides a concise technical analysis of the currency pair, stating: “GBP/USD is significantly oversold on the daily chart ahead of the UK CPI data release, with the 14-day Relative Strength Index (RSI) remaining below 30. Consequently, the pair appears poised for a short-term recovery.”

Dhwani further notes: “A substantial recovery could commence if the pair surpasses the 1.2300 level, which would then test the January 9 high of 1.2367. The next target for upward movement is identified at the 21-day Simple Moving Average (SMA) of 1.2462. Conversely, immediate support is anticipated.”