- High-impact UK CPI data will be published by the Office for National Statistics on Wednesday.
- The UK’s headline and core annual inflation rate is expected to decline, while the monthly CPI is expected to rebound.
- The UK CPI report could significantly impact the Bank of England’s policy outlook, weighing on the pound.
As bets increase on a rate cut by the Bank of England (BoE) as early as April, the all-important Consumer Price Index (CPI) data from the United Kingdom (UK) will be closely watched to gauge the timing of BoE policy. The pivot and its impact on the pound sterling.
The Office for National Statistics (ONS) will release UK inflation data at 07:00 GMT on Wednesday.
What can we expect from the next UK inflation report?
The UK’s headline annual CPI is expected to grow by 3.8% in December, a modest slowdown from the 3.9% increase in November. The reading would be the lowest since September 2021, but still almost double the Bank of England’s target of 2.0%.
Core CPI inflation is expected to fall to 4.9% year-on-year in December, compared with 5.1% growth recorded in November. Meanwhile, the UK monthly CPI is expected to jump 0.2% after falling 0.2% in November.
Analysts at TD Securities (TDS) cited key reasons behind potential easing in headline inflation data, noting that “we do not expect a rebound from the weak November report, and instead look for further weakness in December.” Higher tobacco tariffs add some upward pressure On the headlines, but the decline in leisure and travel would support a decent decline in services to 6.0% y/y – a notable 0.9 percentage point decline under the MPC. This should support a dovish shift soon from the MPC in February, but the cuts likely won’t come until May.”
At a Treasury Committee hearing earlier this month, Bank of England Governor Andrew Bailey said he hoped the recent decline in the cost of mortgages would continue. Bailey declined to comment on the monetary policy outlook but said: “Let’s take the market for a moment – this is clearly fueling mortgage costs and I hope that continues.”
After the UK central bank kept interest rates at 5.25% at its December meeting, Governor Bailey pushed back against speculation in financial markets that interest rates would be cut soon, stressing that the battle to get inflation down to 2% was “difficult”. a job.”
However, a surprise drop in inflation in November has raised hopes that the Bank of England will start cutting interest rates sooner than expected. The Office for National Statistics said lower petrol prices were largely behind the surprise drop in inflation last month, along with a decline in food and household goods inflation.
In the quarter to November, UK wages rose at the slowest pace in almost a year, adding to signs of easing inflationary pressures and concerns from the Bank of England. Average earnings excluding bonuses in the UK rose 6.6% over three months year-on-year in November, slowing from the 7.2% increase in October.
Meanwhile, Britain’s GDP expanded 0.3% in November after falling 0.3% in October. But the economy is still at risk of sliding into recession as households continue to bear the burden of high energy bills and borrowing costs.
Against this backdrop, upcoming UK inflation data could help estimate the pace and timing of interest rate cuts by the central bank this year, which could have a significant impact on the value of sterling.
When will the UK CPI report be released and how could it affect GBP/USD?
UK CPI data will be published on Wednesday at 07:00 GMT. The British pound is correcting from two-week highs of 1.2786 against the US dollar in the run-up to UK inflation. The US dollar is regaining its safe-haven status amid escalating geopolitical tensions in the Middle East.
An unexpected rise in headline and core inflation data could pour cold water on expectations of a Bank of England rate cut as early as April, providing much-needed support to the pound. In such a case, GBP/USD could bounce towards the 1.2785 area. Conversely, GBP/USD could extend its correction towards 1.2600 if UK CPI data shows a rapid decline in inflation and confirms Bank of England bets on a rate cut in April.
Dhwani Mehta, Senior Asia Analyst at FXStreet, provides a brief technical outlook on the major currency and explains: “GBP/USD has breached the 21-day simple moving average (SMA) at 1.2712, with a bearish correction in sight. 14-day relative midpoint from above, indicating more pain ahead of GBP.”
“A sustained move below the bullish 50-day SMA at 1.2611 could intensify selling pressure on GBP. Next downside targets are seen at the 200-day SMA at 1.2548 and the 1.2500 round level. Instead of Therefore, any recovery in GBP/USD will need to be accepted above the 21-day simple moving average support-turned-resistance at 1.2712, above which the doors will reopen to test the two-week high at 1.2786.
Further evidence of deflationary pressures poses the main downside risk to sterling’s outperformance at the start of this year.
-MUFG
Frequently asked questions about gold returns in the UK
UK government bond yields measure the annual return an investor can expect from holding UK government bonds, or UK government bonds. Like other bonds, government bonds pay interest to their holders at regular intervals, a “coupon,” followed by the full value of the bond at maturity. The coupon is fixed but the yield varies as it takes into account changes in the price of the bond. For example, a £100 gold coin may have a coupon of 5.0%. If the price of gold fell to 98 pounds, the coupon would still be 5.0%, but the gold yield would rise to 5.102% to reflect the price drop.
There are many factors that affect government bond yields, but the main ones are interest rates, the strength of the UK economy, the liquidity of the bond market, and the value of the pound sterling. Higher inflation will generally weaken government bond prices and cause government bond yields to rise because bonds are long-term investments vulnerable to inflation, which erodes their value. Higher interest rates affect existing bond yields because newly issued bonds will carry a higher, more attractive coupon. Liquidity can be a risk when there is a shortage of buyers or sellers due to panic or a preference for riskier assets.
Perhaps the most important factor affecting the level of gold returns is interest rates. They are set by the Bank of England (BoE) to ensure price stability. Higher interest rates will raise yields and lower the price of new government bonds because new bonds issued will carry a higher, more attractive coupon, reducing demand for older bonds, which will see a corresponding decline in price.
Inflation is a major factor affecting bond yields because it affects the value of the principal the holder receives at the end of the term, as well as the relative value of the payouts. Higher inflation causes the value of bonds to deteriorate over time, which is reflected in a higher yield (a lower price). The opposite is true for low inflation. In rare cases of deflation, the price of gold may rise – represented by a negative return.
Holders of foreign bonds are exposed to exchange rate risk because the bonds are denominated in British pounds. If the currency strengthens, investors will earn a higher return, and vice versa if it weakens. In addition, gold returns are highly correlated to the British pound. This is because yields are a reflection of interest rates and interest rate expectations, which is the main driver of sterling. Higher interest rates raise the coupon of newly issued government bonds, attracting more global investors. Since it is priced in sterling, this increases the demand for sterling.