UK July CPI Preview: Hot inflation likely to support another Sterling rally

• The Office for National Statistics is due to publish the UK inflation data on Wednesday.
• Core annual inflation and headline inflation are both forecast to edge lower to 6.8%.
• The UK CPI data could cement another BoE rate hike in September.

The all-important Consumer Price Index (CPI) data from the United Kingdom (UK) will be published on Wednesday, August 16. The Bank of England (BoE) raised its policy rate by 25 basis points to 5.25% in August but Governor Andrew Bailey refrained from committing to further policy tightening in the post-meeting press conference. Inflation developments in the UK could influence the BoE’s rate outlook and impact Pound Sterling's valuation.

In the latest projections, the BoE revised inflation forecasts lower. The bank now expects inflation to fall to 4.93% by the fourth quarter of 2023, lower than the May estimate of 5.12%, and sees inflation retreating to 2.82% in one year’s time, compared to 3.38% in May. 

While commenting on the inflation outlook, Bailey told reporters that they were expecting inflation to fall to around 5% in October. The BoE Governor, however, further noted that services price inflation brought unwelcome news since May. 

The data from the UK revealed on Tuesday that the basic wage inflation, as measured by the change in Average Earnings Excluding Bonus, hit a new record growth rate of 7.8% in three months through June. The Unemployment Rate in the same period, however, rose to 4.2% from 4%. The rate-sensitive 2-year UK Gilt yield edged higher after these readings, highlighting the impact of hawkish Bank of England bets. 

What to expect in the next UK inflation report?

Economists are expecting the headline annual UK Consumer Price Index inflation to fall to 6.8% in July from 7.9% in June. The Core CPI is forecast to tick down to 6.8% from 6.9%. On a monthly basis, Britain’s CPI inflation is seen declining 0.5% following the 0.1% growth recorded in June.

Previewing the upcoming UK inflation data and how it could alter the BoE monetary policy, “with our expectation that core inflation remains unchanged at 7.1% in June, coupled with the continued acceleration in wage growth in the past week, it should keep the Bank hiking,” say analysts at Societe Generale and elaborate:

“But whether the Bank downshifts to 25bp or hikes by another 50bp is less certain, with any upside or downside surprise to the CPI data possibly swinging the Bank’s decision. Our forecast is for a downshift to 25bp, in the expectation that more convincing signs that the labur market is cooling will steadily build up. At the end of the week, we expect the harsh mortgage rate environment will weigh on both consumer confidence and retail sales.”

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

Markets are nearly fully pricing in one more 25 basis points (bps) BoE rate hike in September following the latest jobs report. Investors, however, could start leaning toward a 50 bps hike if the monthly CPI arrives in positive territory.  In that scenario, Pound Sterling could gather strength against its rivals. 

On the other hand, investors are likely to refrain from betting on a big BoE rate increase if CPI figures arrive near expectations and show a softening in price pressures. Nevertheless, it will probably take a much weaker-than-forecast inflation reading from the UK for market participants to bet on a no-change in the BoE key rate in September. Hence, the market positioning suggests that Pound Sterling’s losses could remain limited unless there is a significant downside surprise. 

Eren Sengezer, European Session Lead Analyst at FXStreet, offers a brief technical outlook for the GBP/USD pair and explains: “GBP/USD remains stuck between the 50-day and the 100-day Simple Moving Averages (SMA). The Relative Strength Index (RSI) indicator on the daily chart, meanwhile, stays very close to 50, reflecting the pair’s indecisiveness in the near term.”

Eren also outlines important technical levels for GBP/USD: “The 100-day SMA aligns as key support at 1.2600. A daily close below that level could ramp up the technical selling pressure and open the door for an extended slide toward 1.2500 (psychological level, technical level) and 1.2370 (200-day SMA). Looking north, additional gains could be witnessed once GBP/USD flips 1.2800 (20-day SMA, 50-day SMA) into support. In that scenario, 1.2900 (psychological level) and 1.3000 (July 27 high) could be set as next bullish targets.”