GBP/USD dips as UK inflation lower than expected

The British pound has extended its losses on Wednesday. In the European session, GBP/USD is trading at 1.2695, down 0.21%. The pound has been on a slide and is down about 1.2% since March 13.

UK inflation falls by 3.4%

Households in the UK haven’t had much to smile about when it comes to the economy, but there was some good news today as UK inflation dropped to 3.4% y/y in February, down from 4% in January and just below the market estimate of 3.5%. This was the lowest rate since September 2021.

The driver of the drop in CPI was a slowdown in food inflation, while housing and fuel prices showed less of a decline in February than a month earlier, putting upward pressure on inflation. Monthly, CPI rose 0.6%, up from -0.6% in January but below the market estimate of 0.7%.

Core CPI eased to 4.5% y/y, compared to 5.1% in January and below the market estimate of 4.6%. Monthly, core CPI rose 0.6%, up from -0.9% but below the market estimate of 0.7%.

The Bank of England will no doubt be encouraged by the inflation data, which showed a significant drop in February and was lower than expected. The BoE meets on Thursday and is widely expected to maintain the cash rate at 5.25% for a sixth straight time.

The Bank has not yet bought into rate cuts and we can expect a cautious message from Governor Bailey acknowledging that inflation is on a downtrend but that the battle ain’t over yet. There is a concern among BoE policy makers that lowering rates too soon could lead to inflation rebounding, which would force the central bank to zigzag and raise rates.

GBP/USD technical

• GBP/USD is testing support at 12708. Below, there is support at 1.2681.

• There is resistance at 1.2747 and 1.2774.