GBP/USD – will inflation data shake up the pound?

The British pound has been showing limited movement for over a week. In Tuesday’s North American session, GBP/USD is trading at 1.3086, up 0.13% on the day.

UK inflation expected to decline to 1.9%

The Bank of England has largely won the battle against inflation, which has fallen from double digits at its peak to just 2.2% in August and July. Inflation is expected to dip to 1.9% in September thanks to lower petrol prices, reflective of the decline in crude oil prices. This would be a milestone as inflation has been above the BoE’s target since April 2021.

Monthly, inflation is forecast to ease to 0.2%, down from 0.3% in August. Core inflation, which excludes energy and food and is a better indicator of long-term inflation trends, is also expected to decline, from 3.6% to 3.4% y/y and 0.4% to 0.3% m/m.

The BoE has cut rates only once this year and if inflation falls below 2% as expected, the calls for the central bank to cut rates will get louder. Inflation is falling, the economy is barely growing and the cash rate remains very high at 5%. The current trend has been to cut rates – the European Central Bank has lowered rates several times and even the Federal Reserve cut in September by 50 basis points.

If the BoE doesn’t cut before the end of the year, it risks becoming an outlier among the major central banks. Governor Bailey has made conflicting comments about whether the BoE needs to get moving and  cut rates. It will be interesting to hear the Governor’s reaction to Wednesday’s inflation numbers.

GBP/USD Technical

• GBP/USD is testing resistance at 1.3076. Above, there is resistance at 1.3129
• 1.3016 and 1.2963 are the next support levels

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