UK CPI set to grow below 2% target in September, core inflation to remain high

• United Kingdom's Office for National Statistics will release the CPI report on Wednesday.
• The annual UK headline and core inflation are expected to ease in September.
• The UK CPI data could seal in a BoE November interest-rate cut, a scenario that would weigh on Pound Sterling.

The United Kingdom's (UK) Office for National Statistics (ONS) will release the highly anticipated Consumer Price Index (CPI) data for September on Wednesday at 06:00 GMT.

The UK CPI inflation report could affirm expectations of 25 basis points (bps) interest-rate cut by the Bank of England (BoE) in November, injecting a fresh bout of volatility into the Pound Sterling.

What to expect from the next UK inflation report?

The UK annual Consumer Price Index is likely to increase by 1.9% in September, sharply slowing down from August's 2.2% growth while moving back below the BoE's 2.0% target.

The core CPI inflation is set to ease to 3.4% YoY in September from 3.6% in August.

Official data is expected to show that services inflation fell to 5.2% in September from 5.6% the prior month, according to a Bloomberg survey of economists.

The BoE projected the annual headline CPI at 2.1% and services CPI at 5.5% for September.

Meanwhile, the British monthly CPI is seen rising 0.2% in the same period, as against the previous increase of 0.3%.

Previewing the UK inflation data, TD Securities (TDS) analysts noted: "We look for UK inflation to continue its steady march downward. But rapidly falling energy prices still heavily distort the headline number, and services inflation is likely to remain above 5.0% YoY (TDS: 5.2%, mkt: 5.3%), leaving core well above a range the MPC is comfortable with."

"Hotel and airfare prices remain key sources of volatility in the month," the TDS analysts said.

How will the UK Consumer Price Index report affect GBP/USD?

Heading into the UK CPI event risk, Pound Sterling traders weigh in on the odds of the BoE rate cut next month, especially after the contradictory messages from BoE policymakers earlier in October.

BoE Chief Economist Huw Pill said that there is "ample reason for caution in assessing the dissipation of inflation persistence," adding that the "need for such caution points to a gradual withdrawal of monetary policy restriction." Just a day before Pill's appearance, Governor Andrew Bailey noted that the UK central bank "could become a bit more activist on rate cuts if there's further good news on inflation."

Therefore, the UK CPI data could help confirm whether the BoE will resume its rate-cutting cycle after pausing in September.

An upside surprise to the headline and core inflation data would likely douse the market's expectations of a rate cut next month, lifting the Pound Sterling. In such a case, GBP/USD could stage a decisive comeback from multi-week troughs.

Conversely, the GBP/USD downtrend could extend if the UK CPI readings meet forecasts or come in softer-than-expectations. Thus, the UK central bank's progress on disinflation could confirm another rate reduction in November, throwing the British Pound under the bus.

Dhwani Mehta, Asian Session Lead Analyst at FXStreet, offers a brief technical outlook for the major and explains: "GBP/USD has entered a downside consolidative mode in the countdown to the UK CPI data release. The 14-day Relative Strength Index (RSI) holds near 40, suggesting that more losses remain in the offing."

Dhwani adds: "The pair needs to find acceptance above the 50-day Simple Moving Average (SMA) at 1.3115 on a daily closing basis to negate the near-term bearish bias. The next upside targets are seen at the October 4 high at 1.3175 and the 21-day SMA at 1.3215. Alternatively, the immediate support is aligned at the 100-day SMA at 1.2950, below which the March 8 high of 1.2894 could be tested."