- The UK's annual CPI increased by 2.8% in February, missing the 2.9% forecast.
- British inflation rose 0.4% MoM in February, slightly below the 0.5% estimate.
- GBP/USD remains under pressure, trading below 1.2950 after UK inflation data.
The United Kingdom's (UK) Consumer Price Index (CPI) rose 2.8% year-over-year (YoY) in February, down from January’s 3.0% increase, according to data released by the Office for National Statistics (ONS) on Wednesday. The figure came in slightly below market expectations of 2.9% but remained above the Bank of England’s (BoE) 2% target.
Core CPI, which excludes volatile food and energy prices, increased by 3.5% YoY in February, compared to 3.7% in January and below the 3.6% market forecast. Meanwhile, services inflation remained steady at 5% YoY.
On a monthly basis, UK CPI inflation rebounded to 0.4% in February from a -0.1% decline in January, missing estimates of 0.5%.
GBP/USD Reaction to UK CPI Inflation Data
The latest UK CPI data exerts slight downward pressure on the Pound Sterling, causing GBP/USD to dip 0.15% on the day, trading below 1.2950 at the time of writing.
The ONS will release the much-anticipated February CPI data on Wednesday at 07:00 GMT, with market participants closely watching its impact on the BoE’s monetary policy outlook. A softer inflation print could reinforce expectations of interest rate cuts, adding further volatility to the British currency.
What to Expect from the Next UK Inflation Report?
The UK’s CPI inflation was projected to rise 2.9% YoY in February, easing from January’s 3% growth but still above the BoE’s 2% target. Core CPI inflation was expected to decline slightly to 3.6% YoY from January’s 3.7%.
A Bloomberg survey suggested that services inflation might ease to 4.9% YoY in February after reaching 5% in January. On a monthly basis, CPI was expected to rise 0.5% after the previous month’s -0.1% decline.
Analysts at TD Securities predicted inflation to cool slightly, with the headline rate dropping to 2.8% (versus a consensus of 2.9%), core CPI easing to 3.6% YoY, and services inflation slowing to 4.9% YoY. However, they noted that the deceleration remains gradual, which may not be enough to satisfy the BoE’s Monetary Policy Committee (MPC).
How Will the UK CPI Report Affect GBP/USD?
At its recent policy meeting, the BoE held interest rates steady at 4.5%, signaling caution in the face of economic uncertainty. The 8-1 vote split to maintain rates was perceived as hawkish, pushing up UK rate expectations and leading the swaps market to price in 50 basis points of rate cuts over the next year. However, expectations of an additional 25 basis point cut were fully priced out following the MPC’s less dovish stance.
For GBP/USD, a higher-than-expected inflation reading could reinforce the BoE’s cautious approach, limiting rate-cut expectations and driving the Pound higher toward the 1.3050 resistance level. Conversely, a weaker-than-expected CPI print could fuel speculation of aggressive BoE rate cuts, triggering further losses for the GBP/USD pair.
The market’s reaction to the UK CPI report may be short-lived, as investors will also focus on the British Spring Budget Statement later on Wednesday, which could provide further economic and fiscal policy insights.
Technical Outlook for GBP/USD
Dhwani Mehta, Asian Session Lead Analyst at FXStreet, highlights that GBP/USD remains above key daily Simple Moving Averages (SMA), with the 14-day Relative Strength Index (RSI) holding firm above 50. The 50-day and 100-day SMA Bull Cross, confirmed earlier this week, supports the pair’s uptrend.
However, GBP/USD needs to establish support above the 1.3000 psychological level to maintain bullish momentum. A breakout could push the pair toward the November 2024 high of 1.3048, with the next resistance at 1.3100.
On the downside, immediate support lies at the 21-day SMA at 1.2863, followed by the critical 200-day SMA at 1.2800. A sustained break below this level could trigger further selling pressure, potentially testing the 1.2750 psychological support.
