UK CPI Preview: Inflation expected to extend decline in November on lower energy prices

• The all-important UK CPI report will be published by the Office for National Statistics on Wednesday.
• Headline and core annual inflation are likely to extend their declining trend.
• The UK CPI data is set to ramp up end-of-the-year volatility around the Pound Sterling.

Following last week’s hawkish hold by the Bank of England (BoE), the high-impact Consumer Price Index (CPI) data from the United Kingdom on Wednesday will hold the key for the next directional move in the Pound Sterling. The data will be published by the Office for National Statistics (ONS) at 07:00 GMT.

What to expect from the next UK inflation report?

The headline annual UK Consumer Price Index is forecast to rise 4.4% in November, slowing slightly from October’s 4.6% increase. The data would continue to sit at its lowest since October 2021 while more than double the BoE’s 2.0% target.

The Core CPI inflation is seen declining to 5.6% YoY in November, as against a 5.7% reading in October. Meanwhile, Britain’s CPI is expected to rise 0.1% over the month, having reported no growth in October.

Analysts at TD Securities (TDS) cited key reasons behind the likely easing in the headline inflation data, noting that “a 2% m/m decline in petrol prices and heavy base effects in the food component should help pull headline inflation down 0.3ppts. Services inflation will remain key for the BoE, and we expect it to fall to 6.5% y/y—0.4ppts below the BoE's forecast.”

In its December policy statement, the BoE said that “CPI inflation has fallen back broadly as expected, while there has been some downside news in private sector regular Average Weekly Earnings (AWE) growth. However, key indicators of UK inflation persistence remain elevated.”

In light of this, “the Committee continues to judge that monetary policy is likely to need to be restrictive for an extended period of time,” the statement said.

The BoE held the policy rate at a 15-year high of 5.25% following its December meeting and offered no pivot. But the grim economic outlook and loosening labor market conditions led money markets to price in four 25 bps rate cuts starting from June, with the key rate seen slashing from 5.25% to as low as 4.25% by the end of 2024.

Therefore, the upcoming UK inflation data is critical to gauging the timing of the central bank’s policy pivot next year, which could have a significant impact on the value of the Pound Sterling.

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

The UK CPI data will feature at 07:00 GMT on Wednesday. The Pound Sterling is looking to build on its recovery above 1.2200 against the US Dollar in the lead-up to the high-impact United Kingdom’s inflation data. The reinforcement of the hawkish rhetoric from the US Federal Reserve (Fed) officials is helping keep the US Dollar afloat.

An unexpected uptick in the headline and core inflation data could douse hopes for a BoE pivot as early as June, reviving the upswing in the Pound Sterling. In such a case, GBP/USD could revert toward the four-month high of 1.2794. On the contrary, GBP/USD could likely resume its correction toward 1.2500 if the UK CPI data cools down more than expected and affirms the market’s pricing of BoE rate cuts next summer.

Dhwani Mehta, Asian Session Lead Analyst at FXStreet, offers a brief technical outlook for the major and explains: “The GBP/USD pair is likely to stay hopeful as long as it holds above the 21-day Simple Moving Average (SMA) at 1.2616. The 14-day Relative Strength Index (RSI) is holding comfortably above the midline, pointing to more upside.”

“A firm break above Monday’s high of 1.2704 could reinforce the buying interest around the Pound Sterling. The next upside barrier is seen at the 1.2750 psychological level, above which the door will reopen for a test of the multi-month high of 1.2794. Conversely, a daily closing below the 21-day SMA at 1.2616 could trigger a fresh downswing toward the 200-day SMA at 1.2508, which could act as a solid cushion,” Dhwani adds.