UK CPI expected to soften in February, keeping pressure on BoE

• The United Kingdom's Office for National Statistics will release the February CPI data on Wednesday.
• The annual UK headline and core CPI inflation are set to ease slightly in February.
• The UK CPI data could impact the direction of the Pound Sterling and the BoE's interest rates.  

The United Kingdom's (UK) Office for National Statistics (ONS) will publish the highly anticipated Consumer Price Index (CPI) data for February on Wednesday at 07:00 GMT.

The Pound Sterling (GBP) could experience intense volatility following the UK CPI inflation report, as it is likely to alter the market's expectations for the Bank of England's (BoE) future interest rate cuts.

What to expect from the next UK inflation report?

The UK Consumer Price Index is expected to increase by 2.9% year-over-year (YoY) in February, following a 3% growth in January.

The reading is expected to remain distant from the BoE's 2.0% target.

Core CPI inflation, which excludes energy, food, alcohol, and tobacco prices, is expected to be slightly lower at 3.6% (YoY) in February, down from January's 3.7%.

According to a Bloomberg survey of economists, official data is expected to show that service inflation will likely ease to 4.9% in February after jumping to 5% in January.

Meanwhile, the British monthly CPI is expected to rise by 0.5% in the same period, compared to the previous decline of 0.1%.

Previewing the UK inflation data, TD Securities analysts noted: "Inflation is slated to cool slightly, with headline dropping to 2.8% (consensus: 2.9%; prior: 3.0%). We also expect core and services to come in lower, at 3.6% YoY (prior: 3.7% YoY and 4.9% YoY (prior: 5.0% YoY), respectively. While all these numbers are softer than in Jan, the deceleration remains too slow for the Monetary Policy Committee's (MPC) preferences."

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

At its monetary policy meeting earlier this month, the Bank of England (BoE) held interest rates at 4.5% on Thursday, warranting caution against expectations that they would cut rates over its next few meetings amid heightened uncertainty over the UK and global economies.

"However, the 8-1 vote split to stay on hold was a hawkish surprise and triggered an upward adjustment to UK rate expectations. The swaps market continues to price in 50 bps of easing over the next 12 months but has fully priced out any odds of an additional 25 bps cut following the less dovish MPC vote split," BBH analysts noted.

Therefore, an upside surprise to the headline and core inflation data is needed to reaffirm the BoE's prudent approach and increased bets for fewer rate cuts this year.  In such a case, the Pound Sterling uptrend is expected to resume, lifting GBP/USD back toward the 1.3050 barrier. Conversely, softer-than-expected inflation readings will likely alleviate UK economic concerns, reviving expectations for aggressive BoE rate cuts and extending GBP/USD correction from four-month highs.

Any reaction to the UK inflation report is likely to be short-lived, given the upcoming British Spring Budget Statement, scheduled for later on Wednesday.

Dhwani Mehta, Asian Session Lead Analyst at FXStreet, offers a brief technical outlook for the major and explains: "GBP/USD is holding above all major daily Simple Moving Averages (SMA) heading into the UK CPI showdown, with the 14-day Relative Strength Index (RSI) momentum indicator in the daily chart holding firm above 50. The 50-day SMA and the 100-day SMA Bull Cross, confirmed on Monday, remains in play and acts as a tailwind for the pair."

Dhwani adds: "However, the pair needs acceptance above the 1.3000 threshold to initiate a sustained uptrend toward the November 2024 high of 1.3048. The next relevant resistance is aligned at the 1.3100 round level. Alternatively, the immediate support is seen at the 21-day SMA at 1.2863, below which the critical 200-day SMA at 1.2800 will come into play. A sustained break below this level will intensify the selling pressure, potentially leading to a test of the 1.2750 psychological level."