Pound Extends Losses After UK Inflation Unchanged

The British pound continues to lose ground on Wednesday. In the European session, GBP/USD is trading at 1.2546, down 0.35%.

UK inflation holds steady at 4.0%

The January inflation report showed that inflation didn’t budge but was lower than expected. UK CPI in January didn’t move the needle and held at 4.0% y/y, unchanged from December. This was below the market estimate of 4.2%. Monthly, CPI declined 0.6%, compared to a 0.4% in December. This was below the market estimate of -0.3%.]

Core CPI remained unchanged at 5.1% y/y for a third straight month and was below the market estimate of 5.2%. Monthly, core CPI declined by 0.9%, following a 0.6% gain and December. This was lower than the market estimate of -0.8%.

Inflation remains double the 2% target, although the Bank of England has made great progress since the dark days when inflation hit 11%. BoE policy makers will be pleased that inflation was lower than expected and the sharp drop in the monthly core CPI is a bright spot.

The Bank of England meets next on March 21^th and is widely expected to hold the benchmark rate at 5.25%. The BoE has kept rates unchanged since August and there is pressure on the central bank to provide some relief to households and businesses and lower rates. A rate cut would help stimulate the lethargic UK economy but inflation is well above the 2% target and remains sticky, as evidenced by today’s inflation report. The markets have priced in a rate cut in June around 50-50, with a 74% probability of a rate cut in August, according to Refinitiv Eikon.

A busy week in the UK continues on Thursday, with the release of fourth-quarter GBP. The economy contracted by 0.1% in Q3 and is expected to remain unchanged in the fourth quarter. This would indicate two consecutive quarters of contraction which signals a technical recession. If the estimate is wide of the actual release, it could result in volatility for the British pound on Thursday.

GBP/USD Technical

• GBP/USD is testing support at 1.2541. Below, there is support at 1.2505
• There is resistance at 1.2617 and 1.2661x