UK CPI Preview: Inflation set to extend downward trend in September, denting prospects of further rate hikes

• The UK CPI report will be published by the Office for National Statistics on Wednesday.
• Headline and Core annual inflation are set to fall in September but will likely stay above 6.0%.
• The UK CPI data could offer cues on the BoE’s policy path and ramp up Pound Sterling volatility.

The all-important Consumer Price Index (CPI) data from the United Kingdom (UK) for September will be published by the Office for National Statistics (ONS) on Wednesday.

Speaking at the Institute of International Finance Annual Membership Meeting, in Morocco, last Friday, Bank of England Governor Andrew Bailey said that he “sees progress on inflation but there is still work left to do.” On Saturday, Bailey said that he was puzzled by the continued strength of pay growth in Britain, adding that the “usual transmission mechanism is not yet being demonstrated.”

Commenting on stubbornly high wage inflation, Bank of England Chief Economist Huw Pill, said on Monday, “Average Weekly Earnings data is increasingly looking like an outlier.”

The UK economy reported its wage inflation data on Tuesday, with the Average Earnings excluding bonuses rising 7.8% 3M YoY in August, in line with the market forecast while slowing from a revised 7.9% increase seen in the three months to July.

In light of these factors, the British inflation report will be closely scrutinized for fresh cues on the Bank of England’s (BoE) interest rate outlook, which could spike up volatility around the Pound Sterling (GBP).

The current market positioning suggests that the BoE is set to keep the benchmark interest rate on hold at 5.25% once again in November. Meanwhile, “WIRP [World Interest Rate Probability, a gauge by Bloomberg] suggests 30% odds of a hike on November 2, rising to 50% on December 14 and topping out near 55% for February 1. The first cut is not expected until Q4 2024,” analysts at BBH noted.

What to expect in the next UK inflation report?

The headline annual UK Consumer Price Index is expected to increase 6.5% in September as against a 6.7% rise seen in August. The Core CPI is set to edge 6.0% higher YoY in September, slowing from August’s 6.2% growth. On a monthly basis, Britain’s CPI is seen accelerating by 0.4% in the ninth month of the year, having risen 0.3% in August.

Economists expect an outright fall in food prices to be offset by the persistent rise in rents and Oil prices. However, a strong base effect from a year ago could slow the pace of increase in UK inflation in the reported month.

Previewing the UK CPI inflation data, analysts at TD Securities (TDS) explained: “Headline and services inflation likely remained 0.2ppts below the BoE's projections—further bolstering bets for another hold in November. We expect momentum in both core goods and food inflation to normalize further and forecast another weak airfares print—following the biggest August decline on record—as the surge in revenge travel appears to have cooled off.”

When will the UK Consumer Price Index report be released and how could it affect GBP/USD?

The UK CPI data is due at 06:00 GMT on Wednesday. Heading toward the high-impact United Kingdom’s inflation data, the Pound Sterling is consolidating its recent recovery near 1.2200 against the US Dollar. Dovish US Federal Reserve (Fed) talks combined with rising Hamas-Israel geopolitical tensions are keeping markets in limbo, keeping the US Dollar afloat.

A hotter-than-expected headline and core inflation data could revive bets of one more BoE rate hike in December, offering an additional boost to the ongoing upswing in the Pound Sterling.  In such a case, GBP/USD could head back toward the 1.2300 round level. Conversely, should the CPI figures disappoint, GBP/USD could revisit the October low of 1.2036 on fading BoE rate hike expectations.

Meanwhile, Dhwani Mehta, Asian Session Lead Analyst at FXStreet, offers a brief technical outlook for the major and explains: “The GBP/USD pair has been struggling below the critical short-tern resistance of the 200-day Simple Moving Average (DMA) at 1.2202 so far this week. The 14-day Relative Strength Index (RSI) continues to hold below the midline, justifying the ongoing bearish momentum in the pair. Adding credence to the downside view, GBP/USD has confirmed a Death Cross on the daily chart after the 50 DMA cut the 200 DMA from above.”

Dhwani also outlines important technical levels to trade the GBP/USD pair: “The major needs acceptance above the 21 DMA at 1.2202 to initiate a meaningful recovery toward the 1.2250 psychological level. The next powerful resistance for the Pound Sterling is seen at the 1.2300 level. On the downside, powerful support is aligned near 1.2125, below which the multi-month trough at 1.2037 will be back on sellers’ radars.”