UK CPI undershoots estimates and matches prior data

According to the Office for National Statistics (ONS), UK consumer prices steadied in January, with both headline and core inflation numbers matching prior months and undershooting economists’ estimates. In the twelve months to January, headline inflation rose 4.0% (expected: 4.2%; previous: 4.0%), and the core measure—excluding energy, food, alcohol and tobacco—came in at 5.1% (expected: 5.2%; previous: 5.1%). As a note, headline inflation also undershot the Bank of England’s (BoE) forecast of 4.1%. From December to January, headline inflation fell to -0.6%, following last month’s +0.4% rise (expected: -0.3%).

In addition to the data, services inflation, a measure closely monitored by the BoE to gauge domestic price pressures, edged higher less than expected, at 6.5% year on year, against 6.8% expected (previous: 6.4%). The BoE’s forecast was for a 6.6% increase.

As per the ONS, ‘the largest upward contribution to the monthly change in both CPIH and CPI annual rates came from housing and household services (principally higher gas and electricity charges), while the largest downward contribution came from furniture and household goods, and food and non-alcoholic beverages’.

Overall, this morning’s inflation numbers will be a relief for those at the BoE, particularly after yesterday’s somewhat sticky wage data. However, tomorrow’s Q4 (2023) GDP number (preliminary) is expected to signal a mild technical recession for the UK economy. Forecasts heading into the event call for a -0.1% print, matching the Q3 release.

Dovish repricing

Rate pricing reveals traders ramped up their rate-cut bets, echoing a dovish tone following the release. OIS shows that the first 25bp cut for the BoE Bank Rate is expected at August’s policy-setting meeting, moved forward from September’s meeting following the CPI data. Overall, we also see a total of 75bps of easing now priced in for the year-end, increased from 64bps prior to the CPI print. 

GBP is southbound

Weakness was seen across GBP pairings in the immediate aftermath of the CPI release; gilts rose sharply (sending yields lower across the curve) and FTSE 100 futures were bid (as of writing, cash trading opened +0.6% higher). 

You may recall that the FP Markets Research Team released a post on the GBP/USD recently, emphasising a bearish tone for the currency pair. As you can see from the monthly chart, resistance at $1.2715 is providing a ceiling for bears to work with and offers scope to press as far south as support coming in at $1.2173. Interestingly, daily price is also on the doorstep of the range low from $1.2540. Recent analysis indicated a break of range lows was possible.

Monthly chart

Daily chart