UK CPI expected to moderate in October, still well above the BoE's target

• The United Kingdom's Office for National Statistics publishes the October CPI data on Wednesday.
• The annual UK headline inflation is expected to have eased to 3.6% after three months at 3.8%.
• Core inflation is also expected to moderate, keeping hopes of forthcoming BoE interest rate cuts alive.

The United Kingdom (UK) Office for National Statistics (ONS) publishes the highly relevant Consumer Price Index (CPI) data for October on Wednesday at 07:00 GMT. The market consensus anticipates some moderation of inflationary pressures.

UK consumer inflation is a key release for the Bank of England (BoE) and tends to have a significant impact on the Pound Sterling (GBP). The central bank's Monetary Policy Committee meets on December 18, and market speculation about the possibility of an interest rate cut has been on the rise over the last few weeks.

What to expect from the next UK inflation report?

The UK headline Consumer Price Index is forecast to have eased to a 3.6% annual rate in October, after having remained at 3.8% YoY in the previous three months. This is the strongest consumer inflation level since January 2024, and nearly double the BoE's 2% target for price stability.

Month on month, UK CPI inflation is expected to have accelerated 0.4%, after a flat reading in September.

Lower food and energy prices are seen as the main reasons for lower consumer prices. Costs for food and non-alcoholic drinks eased in the second half of the year, following sharp increases on products such as chocolate, coffee, cheese, and eggs earlier in the year. Energy bills have also grown at a slower pace, with Ofgem, the energy regulator for Great Britain, reporting a 2% increase in the year to October, compared to nearly 10% in the same period last year.

Nevertheless, the UK core CPI, considered more relevant for the central bank as it strips off the seasonal impact of food and energy prices, is also expected to have slowed down in October. The yearly rate is seen decelerating to 3.4%, from 3.5% in September and extending its decline from July's peak of 3.8%.

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

Recent UK macroeconomic figures have been showing signs of a significant slowdown, raising speculation about a BoE rate cut in December or January. In this context, receding inflation figures might give further reasons for the BoE's dovish stance.

Data released last week rattled markets as the Gross Domestic Product (GDP) contracted unexpectedly by 0.1% in September and slowed to a 0.1% growth in Q3, down from 0.3% in the previous quarter and below the market consensus of a 0.2% reading. Year-on-year, the UK economy grew at a 1.3% pace in the third quarter, down from 1.4% in the previous one.

Beyond that, Industrial Production slumped 2% in September and Manufacturing Production dropped 1.7%, suggesting that the industrial sector has gripped, which is likely to weigh heavily on the country's economic growth.

Before that, September's employment report revealed an unexpected increase in the Unemployment Rate, which rose to 5% for the first time since 2021 in the height of the COVID crisis. Net employment fell by 22,000, and wage growth, including bonus, eased to 4.8% in the three months to September from the previous 5.0%, completing a grim picture of the UK's outlook.

The Bank of England left its benchmark interest rate unchanged at 4.0% after November's meeting, with four committee members calling for a rate cut. In light of the recent macroeconomic data, if October's inflation numbers confirm market expectations, they may be seen as a green light for the central bank to ease monetary policy in order to support economic growth.

Such an outcome is likely to increase negative pressure on the Pound. More so, bearing in mind the dwindling hopes of a Federal Reserve (Fed) rate cut in December. In this case, FXStreet Analyst, Guillermo Alcala, would expect the pair to resume its broader bearish trend: "The GBP/USD is looking for direction after peaking right above 1.3200. Investors may be awaiting the UK CPI data to make decisions. A soft inflation reading, analysed from a monetary policy perspective, might push the pair below the 1.3085 level, aiming for the key 1.3000 support".

A higher-than-expected inflation reading, on the contrary, is likely to trigger a choppy reaction in the Pound, according to Alcala: "Sticky inflationary levels are likely to pose a headache for the BoE amid the softening economic context. In this case, the Pound reaction is more difficult to ascertain, but the option of a choppy and sideways trading ahead of Thursday's US Nonfarm Payrolls release looks like a plausible option."