The release of softer UK CPI data has pushed the pound lower and increased Bank of England (BoE) rate-cut expectations. The stubborn US inflation data has strengthened the dollar and pushed back expectations for Federal Reserve (Fed) rate cuts.
After dropping on Tuesday, GBP/USD continued to weaken in the European session on Wednesday and reached its lowest level in over a week. Technical analysts have indicated that the pair could drop further.
UK inflation data
The pound dropped sharply in the early European session on Wednesday after the United Kingdom Office for National Statistics (ONS) released softer-than-expected inflation data for January. Annual CPI inflation and core CPI inflation remained at 4% and 5.1%, respectively. Monthly CPI dropped by 0.6% in January, while the monthly Retail Price Index dropped 0.3%.
Commenting on the release, ONS chief economist Grant Fitzner said: “Inflation was unchanged in January, reflecting counteracting effects within the basket of goods and services. The price of gas and electricity rose at a higher rate than this time last year due to the increase in the energy price cap, while the cost of second-hand cars went up for the first time since May. Offsetting these, prices of furniture and household goods decreased by more than a year ago and food prices fell on the month for the first time in over two years. All of these factors combined resulted in no change to the headline rate this month.”
Chancellor Jeremy Hunt also commented on the news and said that “inflation never falls in a perfect straight line, but the plan is working.” He acknowledged the huge progress that has been made in bringing inflation down from 11% and noted that in a few months it will be closer to 2%.
Bank of England rate cuts
Some analysts have argued that the figures are not weak enough to make the Bank of England’s policymakers to change the timing of a policy pivot. Other analysts have, however, said that the soft inflation report and adequate growth in Average Earnings may force the central bank policymakers to consider early rate cuts. BoE Deputy Governor Sarah Breeden said last week that rate cuts will depend on inflation and wage growth data.
US inflation remains sticky
January’s Consumer Price Index (CPI) readings from the US pushed the dollar higher and weighed on the GBP/USD. On a monthly basis, the CPI and the Core CPI increased 0.3% and 0.4%, respectively and beat market expectations. Stubborn US inflation has helped to push back expectations for a rate-cut decision by the Fed in May’s monetary policy meeting and has boosted the USD.
The gloomy market sentiment and the weaker UK inflation data will keep the GBP/USD pair subdued. The appeal for safe-haven assets such as the greenback has increased and helped to support the USD.
BoE Governor Bailey’s appearance in Parliament to move GPB
Later in the day, BoE Governor Andrew Bailey will appear before the House of Lords Economic Affairs Committee. If Bailey welcomes the latest inflation data, GBP/USD could find it hard to gain momentum. On the other hand, if Bailey is more cautious about a policy change and is reluctant to discuss rate cuts, then the pound could rise.