UK CPI Preview: Inflation expected to mostly stay stubbornly high in January

• The Office for National Statistics will release the top-tier UK CPI data for January on Wednesday.
• Headline and core annual inflation from the United Kingdom are set to rise, while monthly CPI is likely to fall.
• The UK CPI report is set to influence the BoE’s interest rate path, rocking the Pound Sterling.

Pound Sterling traders keenly await the release of the high-impact Consumer Price Index (CPI) data from the United Kingdom (UK) on Wednesday, for fresh hints on the timing of the Bank of England’s (BoE) first interest rate cuts this year, as the BoE policymakers continue to push back against expectations of early rate cuts.

The Office for National Statistics (ONS) is due to publish the UK inflation data at 07:00 GMT on February 14.

What to expect from the next UK inflation report?

The headline annual UK Consumer Price Index is forecast to rise 4.2% in January, continuing its rebound from its lowest level since September 2021, registered at 3.9% in November. However, the reading would still be more than twice the BoE’s 2.0% target.

The Core CPI inflation is seen inching a tad higher to 5.2% YoY in January after reporting a 5.1% growth in December. Meanwhile, the British monthly CPI is expected to register a 0.3% decline, following December’s 0.4% increase.

The data will be closely scrutinized to gauge the timing of the Bank of England’s dovish policy pivot, should it indicate inflation persistence.

Following the unexpected uptick in the December CPI data and strong Services PMI, markets scaled back BoE expectations of early and aggressive interest rate cuts. The first cut is now priced in for August and only 70 basis points (bps) of total easing is seen in 2024, as against the odds of 100 bps seen a week ago.  

Previewing the UK inflation data, analysts at TD Securities (TDS) noted that “we look for headline inflation to match the MPC's forecast while services likely rose a tenth more than the MPC expects (TDS: 6.7%, BoE: 6.6%). There is a lot of uncertainty around this print, in part due to the new weights.”

“On net, we see downside risks to our projections, in part as some components could normalize a bit more than we expect after December's upside surprise,” the TDS analysts said.

The potential downside surprise in the CPI data could be justified by a drop in food inflation, which hit its lowest rate since June 2022 at 6.10%, while fresh food inflation slowed to 4.90%, the latest data published by the British Retail Consortium (BRC) showed

The BRC suggested that the non-food price drops came from retailers promoting heavily in January to unload their leftover holiday inventory.

Meanwhile, Average Earnings Excluding Bonus, a measure of wage inflation, rose 6.2% 3M YoY in December, slowing from the previous increase of 6.7%.

However, the 5% surge in Oil prices during January could outweigh the impact of softening food prices and wage inflation. 

Speaking at England's Loughborough University on Monday, BoE Governor Andrew Bailey said that the central bank would put more emphasis on forward-looking data, commenting on the policy outlook. Bailey said that “any UK recession will be shallow.”

At its February policy meeting, the BoE maintained the key rate at 5.25%. Governor Andrew Bailey remained non-committal on what will be the Bank’s next interest rate move in the upcoming meetings. The voting pattern revealed a three-way split, with one member having voted in favor of a cut and two policymakers voting for a hike.

Recently, BoE policymakers have tried to convince markets that the Bank will likely stick to its higher-interest-rate-for-longer narrative, pushing back against easing expectations in the first half of this year.

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

The UK CPI data is due for release on Wednesday at 07:00 GMT. The Pound Sterling has been on the defensive against the US Dollar in the lead-up to the United Kingdom’s inflation showdown. The US Dollar stays supported amid the Middle East geopolitical escalation and reduced Fed rate cut bets.

Hot headline and core inflation data could reinforce the BoE’s hawkish bias, providing a much-needed boost to the Pound Sterling. In such a case, GBP/USD could revert toward the 1.2750 psychological barrier. Conversely, GBP/USD could break the consolidative phase to the downside if the UK CPI data surprises to the downside and revives BoE easing expectations as early as May.

Dhwani Mehta, Asian Session Lead Analyst at FXStreet, offers a brief technical outlook for the major and explains: “The GBP/USD pair continues to range between two key technical barriers, with the 14-day Relative Strength Index (RSI) holding below the midline, suggesting that risks remain skewed to the downside for the Pound Sterling.”

“A decisive break below the horizontal 200-day Simple Moving Average (SMA) at 1.2565 is needed to initiate a fresh downtrend toward the 100-day SMA of 1.2495. Further south, the 1.2450 psychological level could be retested. Alternatively, acceptance above the confluence resistance at around 1.2670 is critical for GBP/USD to sustain any upswing toward the two-week high of 1.2786,” Dhwani adds.