UK Inflation Preview: December’s 30-year top appears at risk; pound has room to rise

GBP/USD has shot higher towards 1.3600, in reaction to the encouraging news from the Russian military, which lifted the overall market mood. Will cable continue its renewed upside on the UK inflation data that is due for release at 0700 GMT on Wednesday.

After the Bank of England (BOE) delivered a hawkish 25-basis point rate hike in January to combat soaring inflation, the British pound has stood resilient in the face of the Fed’s hawkish market pricing, the Russia-Ukraine crisis and Brexit concerns.

Will UK inflation keep surging?

Attention now turns towards the January month UK Consumer Price Index (CPI) data, with economists expecting UK inflation rate to steady at 5.4% YoY while inter-month, CPI is seen falling by 0.4% vs. 0.5% previous. The annualized core CPI is expected to tick higher to 4.3% vs. 4.2% recorded in December.

Economists polled by Reuters expect the annual pace of inflation to arrive at 5.4% again when data is released on Wednesday.

Source: FXStreet

In December, British consumer price inflation rose more than expected to 5.4%, its highest level since March 1992 – roughly three decades. The biggest contributor to the surge in prices came from food, drink and household goods.

A trio of factors, including soaring energy prices, pent-up demand and supply-chain crisis, continue to drive up price pressures. Oil prices eased slightly in the previous month, although that may not be enough to contain the heat in the consumer price inflation.

Trading GBP/USD with UK inflation

According to the latest BOE forecasts, Britain’s inflation is likely to peak at around 7.5% in April, taking more than two years for CPI to return to its 2% target.

This also implies that further heat is likely on the books for UK inflation, and this may lead the BOE to weigh in hefty and faster rate lift-offs in the coming year, in turn, boding well for the pound.

A reading above the expected 5.4%, therefore, could trigger a fresh upswing in cable, driving rates above 1.3600.

Should UK CPI meet estimates, GBP/USD may witness a temporary advance, which could quickly die down.

In case, the reading disappoints with sub-5% print, then it could pour cold water on BOE’s tightening plans and knock down the currency pair towards the recent range lows near 1.3490.