- The high-impact UK CPI data will be published by the Office for National Statistics on Wednesday.
- UK headline and core annual inflation are expected to fall, but monthly CPI is expected to recover.
- The UK CPI report will have a major impact on the BoE's policy outlook, which could have an impact on Sterling.
The United Kingdom's (UK) all-important consumer price index (CPI) data will be closely scrutinized to gauge the timing of the BoE's policy, as hopes rise for a rate cut by the Bank of England (BoE) as early as April. The pivot that will be made and its impact on Sterling.
The Office for National Statistics (ONS) will release UK inflation data at 7pm GMT on Wednesday.
What can we expect from the next UK inflation report?
The main annual UK consumer price index is expected to rise 3.8% in December, slowing slightly from November's 3.9% rise. This would be the lowest level since September 2021, but still almost double the BoE's target of 2.0%.
Core CPI inflation is expected to decline further in December to 4.9% y-o-y compared to the 5.1% y-o-y growth recorded in November. Meanwhile, the UK's monthly CPI is expected to rise by 0.2% after falling 0.2% in November.
Analysts at TD Securities (TDS) cited the main reason why headline inflation data is likely to ease, saying they do not expect a rebound from a weak November report and instead expect December to be even weaker. “I predict that there will be an increase in tobacco taxes.” Adding some upside pressure to the headlines, weakness in leisure and travel should support a strong decline in services to 6.0% y/y, a notable 0.9 percentage point below the MPC. This should support a dovish turn away from February's MPC in the near term, but cuts are unlikely to take place until May. ”
BoE Governor Andrew Bailey told a Treasury Committee hearing earlier this month that he hoped the recent decline in mortgage costs would continue. Bailey declined to comment on the outlook for monetary policy, but said: “Let's look at the market a little bit. Obviously that's having an impact on mortgage costs and we hope that continues to be the case.” Stated.
After the Bank of England left interest rates unchanged at 5.25% at its December meeting, Governor Bailey dismissed speculation in financial markets that interest rates would soon be cut, stressing that the fight to bring inflation down to 2% is “tough”. . work. “
However, an unexpected fall in inflation in November raised expectations that the BoE would start cutting interest rates sooner than expected. The ONS said the fall in petrol prices was the main reason for last month's unexpected fall in inflation, along with easing price inflation for food and household goods.
British wages grew at the slowest pace in almost a year in the first quarter of November, increasing signs that inflationary pressures and BoE concerns are easing. Average profit excluding bonuses in the UK rose 6.6% year-on-year at 3M in November, slowing from a 7.2% rise in October.
Meanwhile, the UK's gross domestic product (GDP) increased by 0.3% in November, following a 0.3% decline in October. However, the economy remains at high risk of slipping into recession as households continue to bear the burden of high utility bills and borrowing costs.
Against this backdrop, upcoming UK inflation data could help estimate the pace and timing of the central bank's interest rate cuts this year, which could have a significant impact on the value of the pound. .
When will the UK Consumer Price Index report be released? What impact could it have on GBP/USD?
UK CPI data will be released on Wednesday at 07:00 GMT. The British pound is correcting from its two-week high of 1.2786 against the US dollar as the UK prepares to tackle inflation. Amid rising geopolitical tensions in the Middle East, the US dollar is regaining its safe-haven status.
The unexpected rise in headline and core inflation data could put a damper on hopes that the BoE will cut interest rates as early as April, giving sterling a much-needed boost. In such a case, GBP/USD could reverse towards the 1.2785 region. Conversely, if his CPI data for the UK shows a sharp decline in inflation and affirms his April rate cut outlook for the BoE, GBP/USD could extend the correction towards his 1.2600 .
Dhwani Mehta, Asia Session Lead Analyst at FXStreet, provides a brief technical outlook for the major currencies, explaining: The 14-day Relative Strength Index (RSI) is above the midline, suggesting more pain ahead for the pound. ”
“A sustained move below the rising 50-day SMA of 1.2611 could increase selling pressure on GBP. The next downside targets appear to be at the important 200-day SMA of 1.2548 and the 1.2500 round level. Alternatively, a recovery for GBP/USD will require acceptance above the 21-day SMA support-turned-resistance at 1.2712, above which the door is once again open to test the two-week high at 1.2786. ” Dhwani added.
Further evidence of disinflationary pressures has become the main downside risk to the pound's outperformance earlier this year.
–MUFG
UK Gold Yield FAQs
The UK Gilt Yield measures the annual return an investor can expect from holding UK government bonds (gilts). Like other bonds, gilts pay periodic interest “coupons” to their holders and then pay the full amount of the bond at maturity. The coupon is fixed, but the yield fluctuates to account for changes in bond prices. For example, £100 worth of Gilt might come with a 5.0% coupon. If the price of gilt falls to £98, the coupon will still be 5.0%, but the gilt yield will rise to 5.102% to reflect the fall in price.
There are many factors that influence gilt yields, but the main ones are interest rates, the strength of the UK economy, bond market liquidity and the value of sterling. Since gilt is a long-term investment and is subject to inflation which erodes its value, an increase in inflation will generally cause the price of gilt to fall, leading to an increase in the yield on gilt. An increase in interest rates impacts existing gilt yields as newly issued gilts come with higher and more attractive coupons. Liquidity can be a risk if there is a shortage of buyers or sellers due to panic or a preference for riskier assets.
Perhaps the most important factor influencing the yield level of gilts is the interest rate. These are set by the Bank of England (BoE) to ensure price stability. When interest rates rise, yields rise and the price of gilt falls. This is because newly minted gilts are given higher and more attractive coupons, reducing demand for old gilts and causing prices to fall accordingly.
Inflation is an important factor affecting gilt yields, as it affects the relative value of principal and repayments that holders receive at the end of the term. Rising inflation will worsen the value of Gilts over time, reflected in higher yields (lower prices). The opposite is true when inflation is low. In rare cases of deflation, gilt prices can rise, as exemplified by negative yields.
Since Gilt is denominated in British Pound Sterling, foreign Gilt holders are exposed to currency risk. When a currency appreciates, investors realize higher returns, and vice versa when a currency depreciates. Furthermore, gold and silver yields are highly correlated to the British pound. This is because yields reflect interest rates and interest rate expectations and are a key driver of the pound. When interest rates rise, the coupons on newly issued gilts increase, attracting more global investors. Prices are set in pounds, which increases the demand for pounds sterling.
