UK CPI inflation expected to rise in January, challenging BoE’s policy outlook

• United Kingdom’s Office for National Statistics will publish the January CPI data on Wednesday.
• The annual UK headline and core CPI inflation are expected to increase in January.
• The Pound Sterling braces for volatility on the UK CPI report data release amid a prudent BoE.

The high-impact Consumer Price Index (CPI) data from the United Kingdom (UK) for January will be published by the Office for National Statistics (ONS) on Wednesday at 07:00 GMT.

The Pound Sterling (GBP) could witness a big reaction to the UK CPI inflation report, which will likely have a strong bearing on the Bank of England’s (BoE) interest rate-cut path amid upside risks to inflation.

What to expect from the next UK inflation report?

The UK Consumer Price Index is expected to rise at an annual rate of 2.8% in January after increasing by 2.5% in December.

The reading is set to move further away from the BoE’s 2.0% target.

Core CPI inflation, which excludes energy, food, alcohol and tobacco prices, is forecast to climb to 3.7% YoY in January from December’s 3.2%.

According to a Bloomberg survey of economists, official data is expected to show that service inflation jumped to 5.2% in January after falling to 4.4% in December.

Meanwhile, the British monthly CPI is seen declining 0.3% in the same period, as against the previous growth of 0.3%.

Previewing the UK inflation data, TD Securities analysts noted: “Inflation is set to rebound sharply after December airfares were surveyed early in the month and missed the usual seasonal bump. The Monetary Policy Committee (MPC) expects this too, and is looking for core inflation of 3.9% year-on-year (YoY), having set the bar quite high for upside inflation surprises in the next few months. Still, it’ll make for uncomfortable reading even if some of the drivers are temporary.” 

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

At its monetary policy meeting earlier this month, the BoE lowered the benchmark policy rate by 25 basis points (bps) to 4.5% after the UK annual headline and services inflation unexpectedly cooled in December.

However, BoE Governor Andrew Bailey maintained a cautious stance on future rate cuts, noting that “we must judge in future meetings whether underlying inflation pressures are easing enough to allow further cuts.”

“We must proceed carefully,” he added.

Therefore, the January UK CPI data will be closely scrutinized for fresh hints on the BoE’s easing trajectory.

A hotter-than-expected headline and core inflation data will strengthen the expectations of the BoE’s prudent approach to policy easing, providing a fresh boost to the Pound Sterling uptrend. In this case, GBP/USD could target the 1.2700 round figure. On the other hand, a downside surprise in the inflation readings could rekindle bets for aggressive BoE rate cuts, fuelling a GBP/USD correction from over two-month highs.

Dhwani Mehta, Asian Session Lead Analyst at FXStreet, offers a brief technical outlook for the major and explains: “GBP/USD is challenging the key resistance near 1.2605 heading into the UK CPI data release, with the 14-day Relative Strength Index (RSI) momentum indicator in the daily chart holding firm above 50. The 21-day Simple Moving Average (SMA) is on the verge of crossing the 50-day SMA from below, which, if it occurs on a daily closing basis, will confirm a Bull Cross. These technical indicators point to a sustained uptrend for the pair.”

Mehta adds: “However, the pair needs acceptance above the 100-day SMA at 1.2665 to initiate a meaningful upside toward the 200-day SMA at 1.2788. Ahead of that level, the 1.2700 round level must be recovered. On the flip side, the immediate support is seen at the 21-day SMA and the 50-day SMA confluence at around 1.2460. Should the selling pressure intensify, the rising trendline support drawn from the January 13 low at 1.2357 will come to the buyers’ rescue.