UK inflation preview: Why GBP/USD risks are skewed to the upside

The UK publishes the inflation report for February on Wednesday, March 20th, at 9:30 GMT.

The headline Consumer Price Index stood at an increase of 1.8% in January, and a repeat of the same number is on the cards for February. Core CPI was at 1.9% and also here, a repeat is on the cards. The Retail Price Index is also projected to remain unchanged, 2.5% in this case.

Producer Prices are set to see more significant fluctuations, but they rarely have a role in moving GBP/USD.

And as Brexit news are all the rage, what can move GBP/USD?

The inflation report is still a top-tier economic indicator, and the recent past has shown that substantial economic releases still have an impact, even if limited in movement and the timing of the effect. 

UK inflation rose in the aftermath of Brexit and the lower exchange rate but has since stabilized. The slide in oil prices experienced late in 2018 pushed global headline inflation lower. The recent increase has yet to have a significant impact on consumer prices. 

Three reasons why risks are skewed to the upside

1) Brexit is looking better: At the time of writing, Brexit is not set to happen on March 29th but will be delayed. The rejection of a no-deal Brexit and the scope of a delay or perhaps even a cancellation of the UK's exit has already set GBP/USD on an upwards trajectory.

2) Upbeat jobs report: The UK reported a drop in the unemployment rate to 3.9% and an upbeat pace in wage growth: 3.4%. A second consecutive optimistic figure will paint a rosy picture of the UK economy ahead of the Bank of England's rate decision on Thursday.

3) Expecting Fed dovishness: The third positive bias comes from the other side of the Atlantic. The US Federal Reserve announces its rate decision later on Wednesday and markets expect a repeat of the dovish stance. The Fed is on course to reiterate its message of "patience" regarding interest rates. This speculation weighs on the greenback. 

All in all, the wind is currently blowing in favor of GBP/USD bulls. An inflation rate of 1.9%, 2%, or higher will thus go with the current trend and could propel the pound to higher ground.

What if the data falls short of expectations? In this case, the pound/dollar could slide, but the downing is not expected to be anywhere near devastating. 

Conclusion

The UK inflation is expected to show stability on all the critical numbers. While the Brexit focus limits the moves, an upside surprise has a higher chance of making an impact.