The UK Office for National Statistics (ONS) will release the February Consumer Price Index (CPI) figures on Wednesday at 07:00 GMT, a print that will matter for markets. Consensus expectations point to inflation pressures keeping their grasp on the economy.
UK consumer inflation remains one of the most important inputs for the Bank of England (BoE) and typically carries real weight for the British Pound (GBP). Following the latest hawkish hold by the BoE on March 19, investors now anticipated the ‘Old Lady’ to hike its policy rate at its April 30 gathering.
What to expect from the next UK inflation report?
Headline UK CPI is expected to rise 3% in the year to February, matching the January reading. On a monthly basis, inflation is seen gaining 0.4%, reversing the 0.5% contraction recorded the previous month.
Core inflation, which strips out the more volatile food and energy components and is therefore more closely watched by the BoE, is forecast to have gained 3.1% on an annual basis. From a month earlier, core CPI is expected to have accelerated to 0.5%, after declining by 0.6% at the beginning of the year.
How will the UK CPI data affect GBP/USD?
The BoE’s rate-setting MPC voted unanimously to keep the bank rate at 3.75% last week, its second consecutive hold since it slashed rates by 25 basis points in December.
At its latest meeting, the BoE maintained its interest rates at 3.75%, but the event revealed a more hawkish stance than anticipated. The 9-0 decision, a sign of agreement, highlighted worries about inflation stemming from climbing energy costs. The Consumer Price Index is expected to hover around 3% in the second quarter and 3.5% in the third.
Governor Andrew Bailey noted that there has been an immediate rise in petrol prices and warned that household energy costs will increase if these trends continue. The Monetary Policy Committee (MPC) emphasised awareness of second-round effects, cautioning that prolonged energy shocks might necessitate stricter monetary policy, while acknowledging that weak growth could alleviate medium-term inflationary pressures.
Implied rates currently suggest a little more than 67 basis points of tightening will occur this year, while consensus sees the central bank increasing its policy rate by a quarter point at its next gathering.
Back to technicals, Senior Analyst at FXStreet, Pablo Piovano, notes that GBP/USD appears to have encountered some contention at its current yearly lows near 1.3200 (March 13). “Further weakness from here could expose a move toward the November 2025 base at 1.3010 (November 5),” Piovano adds.
“In case bulls regain the upper hand, there is interim resistance at the 55-day SMA at 1.3495, ahead of the weekly top at 1.3574 (February 26) and the YTD ceiling at 1.3868 (January 27),” he concludes.
Piovano also points out that momentum indicators remain bearish for now, as the Relative Strength Index (RSI) eases below the 47 level and the Average Directional Index (ADX) near 30 suggests quite a strong trend.
Inflation FAQs
Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.
The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.
Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.
Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it.
Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.
Economic Indicator
Core Consumer Price Index (YoY)
The United Kingdom (UK) Core Consumer Price Index (CPI), released by the Office for National Statistics on a monthly basis, is a measure of consumer price inflation – the rate at which the prices of goods and services bought by households rise or fall – produced to international standards. The YoY reading compares prices in the reference month to a year earlier. Core CPI excludes the volatile components of food, energy, alcohol and tobacco. The Core CPI is a key indicator to measure inflation and changes in purchasing trends. Generally, a high reading is seen as bullish for the Pound Sterling (GBP), while a low reading is seen as bearish.
