Market Analysis

As services inflation stays high, the UK CPI is predicted to increase by more than 2%

Amos Simanungkalit · 14 Aug9.2K Views

The United Kingdom (UK) will release its Consumer Price Index (CPI) for July on Wednesday, marking a significant macroeconomic event. The data, issued by the Office for National Statistics (ONS), plays a crucial role in shaping the Bank of England’s (BoE) monetary policy decisions and influencing the Sterling Pound (GBP).

At their last meeting in late July, the BoE reduced the Bank Rate by 25 basis points (bps) to 5%, following CPI inflation figures of 2% for May and June, which aligned with the central bank's target.

What to Expect from the Upcoming UK Inflation Report

For July, the UK CPI is anticipated to rise at an annual rate of 2.3%, slightly above the BoE's preferred 2%. Core inflation is projected to be 3.4%, a reduction from June’s 3.5%.

These expected figures are in line with the central bank's recent forecasts. The Monetary Policy Committee (MPC) had indicated that “CPI inflation is projected to increase to around 2¾% in the latter half of the year due to the fading impact of last year’s energy price declines, which will more clearly reflect the ongoing domestic inflationary pressures. Private sector regular average weekly earnings growth has dropped to 5.6% in the three months to May, and services consumer price inflation decreased to 5.7% in June.”

The MPC Minutes also highlighted concerns about international goods prices and the associated risks for the UK’s inflation outlook.

Given this context, an increase in inflation figures is unlikely to prompt an immediate interest rate hike, as policymakers are cautious about the persistent challenges. Conversely, a rate cut remains unlikely at this stage: “Monetary policy needs to remain restrictive long enough until the risks to sustainably achieving the 2% target in the medium term diminish further.”

Attention will be focused on services inflation, which remained at 5.7% year-over-year (YoY) in June. A decrease in services inflation could be interpreted as a positive sign, potentially leading to speculation about a rate cut when the BoE meets in November.

When Will the UK CPI Report Be Released and How Could It Affect GBP/USD?

In the current climate, the upcoming UK CPI data is likely to be viewed with caution. As mentioned, the anticipated rise in annual inflation is expected and won’t prompt immediate policy changes. However, if inflation figures exceed expectations, it may lead to speculation about a more hawkish BoE stance and a delay in the next interest rate cut, potentially strengthening the Pound Sterling against major rivals.

Conversely, a lower-than-expected CPI outcome might increase the likelihood of an imminent rate cut, putting pressure on the British currency. An unlikely scenario of CPI falling below 2% could lead to speculation about an earlier rate cut, potentially causing a significant drop in GBP.

Valeria Bednarik, FXStreet's Chief Analyst, discusses potential GBP/USD scenarios post-CPI release: “The GBP/USD pair hovers around the 1.2800 mark ahead of the announcement, with reduced demand for the US Dollar following a week of risk-aversion. The pair hit a low of 1.2664 last week, which could be a bearish target if annual CPI falls below 2%. Conversely, a reading above 2.5% may drive GBP/USD towards the 1.2900 region.”

From a technical perspective, Bednarik notes: “Bullish potential appears limited according to the daily chart. Despite some advances, technical indicators remain in negative territory. The positive momentum seems to be waning ahead of the announcement. The pair remains below a firmly bearish 20 Simple Moving Average (SMA), currently providing resistance around 1.2830. Additionally, the 100 and 200 SMAs are directionless below the current level, suggesting that buying interest is insufficient to sustain a bullish trend.”