UK Inflation Cools More Than Expected, Pound Loses Ground

The British pound is lower on Wednesday following the UK inflation report. In the European session, GBP/USD is trading at 1.2897, down 0.36%.

UK inflation for February rose 2.8% y/y, below the market estimate of 2.9%. This was lower than the 3% gain in January. The main contribution to the drop in inflation was lower prices for clothing and housing. On a monthly basis, CPI rose 0.4%, up from 0.1% in January but lower than the market estimate of 0.5%. Core CPI also eased, falling from 3.7% to 3.5%.

The drop in inflation is good news but the Bank of England remains concerned about the upside risk of inflation. Services inflation, which has been sticky, was unchanged at 5%.

The BoE will consider a rate cut at the next meeting in May, but will be monitoring the effects of increased employer taxes starting in April as well as today's Spring Statement.

At last week's meeting, the BoE expressed concern over worsening "global trade policy uncertainty" and pointedly mentioned US tariffs. The Trump administration's new trade policy has raised trade tensions and a global trade war would hurt growth and boost inflation.

Finance Minister Reeves announces deep spending cuts

The slight drop in inflation is also good news for Finance Minister Rachel Reeves, who delivered the budget update today. The update did not contain any further tax increases and announced deep spending cuts. Borrowing a phrase from the Bank of England at last week's meeting, Reeves said "increased global uncertainty" had increased borrowing costs and led to economic instability.

GBP/USD Technical

GBP/USD has pushed below support at 1.2940. The next support level is 1.2864

There is resistance at 1.2940 and 1.2991