The UK CPIs Overview
The cost of living in the UK as represented by the Consumer Price Index (CPI) for August month is due early on Wednesday at 06:00 GMT. Given the recently positive inflation and employment data, coupled with the Bank of England’s (BOE) emphasis on CPI to dial back the bond purchase, today’s data will be watched closely by the GBP/USD traders.
It should be noted, however, that the covid fears and the chatters over the winter lockdown in the UK, as well as the market’s attention on collecting clues for the next week’s Fed meeting, dim the importance of today’s data.
The headline CPI inflation is expected to rise from 2.0% previous readouts to 2.9% on an annual basis while the Core CPI, which excludes volatile food and energy items, is likely to follow the suit with 2.9% figures versus 1.8% prior. Talking about the monthly figures, the CPI could rise to 0.5% MoM versus 0.0% marked in July.
In this regard, analysts at TD Securities said,
We see upside risks to August inflation data, with headline CPI registering 3.0% y/y (market forecast: 2.9%, BoE: 3.0%). We expect core inflation to post an even stronger reading of 3.1% y/y (expectations: 2.9%). This comes after a sharp decline in inflation last month owing to weak service prices that should see some rebound in August. Base effects are also (temporarily) important, as last years Eat Out to Help Out program artificially depressed restaurant prices. Inflation is set to rise even further toward 4% y/y by year-end.
How could it affect GBP/USD?
GBP/USD holds lower grounds near the weekly low, recently picking up bids to 1.3810, heading into Wednesday’s London open. Alike other major currency pairs, GBP/USD also struggles for a clear direction as the US dollar edges higher and in contrast to the US Treasury yields rebound after the inflation miss fail to tame the Fed tapering tantrum. Also challenging the cable pair are the Brexit woes and skepticism over the UK’s covid performance amid rumors that the government is bracing for winter lockdown.
That said, today’s inflation numbers could help the BOE hawks to reiterate their policy adjustment demands. However, the pandemic and mixed employment data for August, published the previous day, challenges the tapering concerns of the “Old Lady”. Hence, today’s inflation numbers may have a little impact on the GBP/USD prices unless offering a big surprise.
Technically, GBP/USD reversal from 100-DMA, near 1.3915, directs sellers towards a three-week-old rising support line near 1.3765.
About the UK CPIs
The Consumer Price Index released by the Office for National Statistics is a measure of price movements by the comparison between the retail prices of a representative shopping basket of goods and services. The purchasing power of GBP is dragged down by inflation. The CPI is a key indicator to measure inflation and changes in purchasing trends. Generally, a high reading is seen as positive (or bullish) for the GBP, while a low reading is seen as negative (or Bearish).