The UK CPIs Overview
The cost of living in the UK as represented by the Consumer Price Index (CPI) for February month is due early on Wednesday at 07:00 GMT. The key inflation data will be watched closely after the Bank of England (BOE) policymakers have teased upbeat economic recovery while ignoring reflation fears. It should, however, be noted that the inflation figures precede preliminary readings for March activity numbers and hance will have a short-term impact on the GBP/USD prices.
The headline CPI inflation is expected to rise from 0.7% prior to 0.8% on an annual basis. Though, the Core CPI that excludes volatile food and energy items is likely to remain unchanged at 1.4% previous readouts. Talking about the monthly figures, the CPI could reverse the previous -0.2% release with +0.5% prints.
In this regard, analysts at TD Securities said,
We’re looking for inflation trends to hold fairly steady in February, with core CPI remaining unchanged at 1.4% y/y (market consensus 1.4%), and headline CPI edging just a touch higher to 0.8% y/y (market forecast 0.8%). The bigger increases in the inflation rate, in both core and headline inflation, should come in April and May on positive base effects. The February results should leave inflation sitting just a touch above what the BoE had forecast, so we don’t look for any major policy implications.
Deviation impact on GBP/USD
Readers can find FXStreet’s proprietary deviation impact map of the event below. As observed, the initial market reaction is likely to remain confined between 15 and 80 pips in deviations up to 2 to -3. The same suggests the importance of the key inflation data for GBP/USD pair traders.
How could it affect GBP/USD?
By the press time of pre-London open on Wednesday, GBP/USD drops to a fresh six-week low as bears eye 1.3700, currently down 0.20% near 1.3723. The US dollar’s broad strength and doubts over the UK’s economic recovery, coupled with the previous day’s downbeat employment figures, seem to hammer the cable by the press time.
Even so, the BOE stays optimistic and hence today’s CPI will be the key as strong price pressures in the economy, without welcome GDP and employment, needs to be cooled down, which in turn highlights the reflation fears and can strengthen the bears.
As a result, mildly positive CPI data will be welcome for the GBP/USD corrective pullback. Though, either strong price pressure or downbeat inflation data will be more negative for the cable while going forward.
Technically, a sustained break of 50-day SMA of 1.3830 and bearish MACD directs GBP/USD sellers towards a 100-day SMA level of 1.3617. However, any further downside depends upon the pair’s ability to pierce off February’s low of 1.3566.
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).