UK inflation data to give BoE last hint before interest rate decision

• UK CPI is expected to rise at a steady 2.2% in the year to August.
• The Bank of England will announce its monetary policy decision on Thursday.
• Sterling is technically bullish and could break above the 1.3300 mark.

The Office for National Statistics (ONS) in the United Kingdom (UK) will release consumer price index (CPI) figures for August on Wednesday. Inflation, as measured by the CPI, is one of the main factors on which the Bank of England (BoE) bases its monetary policy decision, meaning the data is considered a major driver of the British pound (GBP).

The BoE met in August and decided to cut the benchmark interest rate by 25 basis points (bps) to 5%, a decision supported by a narrow majority of 5 of the 9 voting members of the Monetary Policy Committee (MPC ). The widely anticipated announcement had a negative impact on the pound, which went into a selling spiral against the US dollar, sending the GBP/USD pair down to 1.2664 a few days after the event.

What to expect from the next UK inflation report?

UK CPI is expected to have risen at an annual pace of 2.2% in August, on par with July’s print. The annual core reading is forecast at 3.5%, up from the previous 3.3%. Finally, the monthly index is expected to rise 0.3 percent after falling 0.2 percent in July.

It’s worth adding that the BoE will announce its monetary policy on Thursday and that inflation levels could affect policymakers’ decision. Ahead of the announcement, financial markets expect officials to keep rates on hold before taking a more hawkish stance from November. The central bank anticipated that inflation could reach 2.75% in the coming months, before falling gradually and even falling below the 2% target in 2025.

Meanwhile, the BoE published a quarterly survey of public inflation expectations last week, which showed that inflation for the next 12 months is expected to fall to 2.7%, the lowest in three years. However, the 5-year outlook ticked higher to 3.2% from 3.1% in May. The numbers support the case for rates on hold, as does the expected CPI output.

Finally, it is worth noting that the UK entered a technical recession in the last quarter of 2023. The economy has since recovered, but growth is slow and the risk of another downturn remains.

In such a scenario, a slight deviation from the expected numbers could have a limited impact on the pound sterling. The higher-than-expected readings could dampen hopes for aggressive rate cuts, but the path is clear. The BoE will cut interest rates and there is no room for hikes. Even more, market participants do not expect the BoE to offer a cut when it meets later this week, which would likely reduce the potential impact on the currency.

When will the UK Consumer Price Index report be released and how could it affect GBP/USD?

The UK Office for National Statistics will release CPI data for August at 06:00 GMT on Wednesday. Before looking at the potential scenarios, there is one more thing to consider: despite global inflation hovering around the central bank’s target, services inflation has remained fairly warm and above 5% for most of the year, doubling with over the general one.

That said, a modest increase in inflation could be seen as a result of modest interest rate cuts, but it won’t surprise investors enough to consider the opposite scenario. On the contrary, a lower-than-expected result, with services inflation easing, should fuel hopes for more aggressive rate cuts and put sterling under strong selling pressure.

FXStreet Chief Analyst Valeria Bednarik notes: “GBP/USD is heading into the event trading above the 1.3200 mark and not far from the August monthly high of 1.3265. Most of the pair’s strength is a result of the US dollar’s weakness as the Federal Reserve (Fed) is expected to make its first interest rate cut on Wednesday. The Fed event is likely to overshadow the UK CPI release as market players would wait until after the US central bank announcement to take positions.”

Technically, Bednarik adds: “GBP/USD is bullish according to technical readings on the daily chart. A break of the aforementioned August high could lead to a quick test of the 1.3300 threshold, while once above the latter, the rally may continue towards 1.3360. A daily close above the 1.3300 level would support the case for a steady advance in the coming days. On the other hand, the pair should drop below the 1.3140 region to jeopardize the bullish situation. In this case, the next level to watch and potential bear target comes at 1.3000.”