On Wednesday, data from the Office for National Statistics (ONS) indicated that the UK’s composite consumer price index (CPI) experienced a year-on-year increase of 3.0% in January, following a 3.4% rise in December.
The market had anticipated a 3.0% growth during this period. It’s important to note that UK inflation remains significantly above the Bank of England’s (BoE) target of 2%.
Core CPI, which excludes the often volatile food and energy sectors, rose by 3.1% year-over-year, slightly down from the previous 3.2%, aligning with market expectations.
More updates to follow…
Today at 07:00 GMT, the CPI data for January is scheduled for release.
The ONS predicts that headline inflation will slow to 3% in December, down from 3.4%. During its recent policy meeting, the central bank indicated it expects price pressures to ease to around 3% in the initial quarter of 2026, with further declines to nearly 2% by the second quarter.
Core CPI is projected to have increased at a slower rate, estimated at 3.1%, compared to the 3.2% reported previously. Furthermore, the monthly inflation rate is expected to drop by 0.5% after a previous increase of 0.4% in December.
Investors are keenly watching UK inflation data for insights into the potential direction of the BoE’s monetary policies. Interest in dovish expectations for the central bank has intensified following the release of UK labor market data on Tuesday, which showed rising unemployment and moderate wage growth.
What impact could UK CPI data have on GBP/USD?
As of this moment, GBP/USD is slightly lower at about 1.3556. The 20-period exponential moving average (EMA) is trending downward at 1.3593, continuing to hinder recovery. Prices are lingering below this average, suggesting a near-term bearish outlook.
The current 14-day relative strength index (RSI) of 39 indicates slowing momentum, which seems to favor sellers.
The overall sentiment regarding price movement is bearish as it exits the symmetrical triangle formation, also identified as a volatility contraction pattern (VCP). Typically, when this pattern breaks down, swings become more pronounced, and the downward volume amplifies. A dip below Tuesday’s low of 1.3500 could potentially lead to further declines toward the significant threshold of 1.3400.
Frequently asked questions about inflation
Inflation indicates the rise in prices of a typical basket of goods and services. This measurement usually appears as a percentage change both month-over-month (MoM) and year-over-year (YoY). Core inflation, which excludes more volatile elements like food and fuel, is what economists closely monitor and is often targeted by central banks aiming for a manageable inflation rate, generally around 2%.
The Consumer Price Index (CPI) gauges how the prices of a basket of goods and services change over time. This, again, is typically expressed as a percentage MoM and YoY. Core CPI is what central banks target and it excludes volatile components like food and fuel. When core CPI exceeds 2%, interest rates tend to rise; conversely, they drop when CPI falls below this threshold. A rise in interest rates usually strengthens the currency, thus an increase in inflation generally leads to currency appreciation, and the opposite occurs when inflation decreases.
It might seem strange, but when inflation rates in a country are high, the value of its currency tends to increase. This occurs because central banks usually raise interest rates to tackle rising inflation, attracting global investment from those seeking advantageous placements for their money.
Historically, gold was seen as a go-to asset for investors during periods of high inflation, given its lasting value. Even now, many buy gold as a safe haven during extreme market volatility. However, this isn’t always the case. As inflation rises, central banks respond by increasing interest rates, which negatively impacts gold due to the opportunity cost associated with holding interest-earning assets or keeping funds in a savings account. In contrast, lower inflation is typically positive for gold, as it leads to reduced interest rates, making gold a more appealing investment.
