UK inflation report outlook: GBP/USD may stumble on another CPI slide


  • UK inflation is set to slow to 1.6% yearly in October. 
  • Odds of a rate cut may rise if CPI extends its slump.
  • GBP/USD bias is to the downside after weak data, fresh election uncertainty.

Falling prices are good news for consumers – especially as wage growth is dropping – but may send sterling lower. 

Low UK inflation expectations 

Headline Consumer Price Index (CPI) has missed expectations in the past two months by standing at 1.7% annual. Economists seem to have adapted their expectations and forecast a further deceleration to 1.6% in October's inflation report. 

Low expectations may lead to an upside surprise – but these downbeat projections are justified. The pound's exchange rate jumped in October as Prime Minister Boris Johnson struck a new Brexit deal with the EU. A higher sterling value lowers the prices of imported goods. Moreover, flash estimates for euro-zone CPI have also shown a drop – and the UK is still tied closely to the bloc. 

The Bank of England has also downgraded its inflation forecasts in its latest quarterly Monetary Policy Report, with two members already desiring to cut interest rates. Slower UK growth has lowered price pressures

Expectations may even be too optimistic once again – a slowdown to 1.4% or 1.5% cannot be ruled out. Even an "as expected" outcome would send CPI to the lowest levels since early 2017. Back then, annual inflation was picking up after the vote to leave the EU sent the pound plummeting. 

UK inflation 2015 2019 development falling

GBP/USD bearish bias

Britain's inflation figures are released after two other significant publications. The labor market report showed the jobless rate to 3.8% – but a drop of 52,000 in total employed. And as mentioned earlier, wage growth has slowed down from 3.8% to 3.6% yearly. 

The second release this week has also fallen short of expectations. UK Gross Domestic Product has risen by 0.3% in the third quarter, but yearly expansion decelerated to 1%. These downbeat figures have weighed on the pound, and political developments have also turned adverse for sterling.

Nigel Farage, leader of the Brexit Party, initially sent GBP/USD higher by withdrawing candidates from competing against incumbent Conservative MPs. However, the right-wing outfit will refrain from abandoning marginal seats that Tories need to win for a majority – pushing cable lower. 

Technically, GBP/USD has been rejected at the confluence of the 50 and 100 Simple Moving Averages on the four-hour chart and suffers from downside momentum.

 

GBP USD technical analysis November 12 2019

Overall, the bias is bearish. 

Three inflation and GBP/USD scenarios

1) As expected: If inflation slows down to 1.6% as the economic calendar shows, sterling has room to retreat. The bearish bias stemming from weak figures early this week, the perceived lower chances of a Conservative majority, and the frail inflation figure in absolute terms may all weigh. This is the base-case scenario.

2) Worse than expected: A downbeat headline CPI figure of 1.5% or lower may already send the pound significantly lower. Such a scenario cannot be ruled out.  Moreover, the BOE targets a CPI level of 2%, with a range of 1-3%. A fall toward the bottom of the range raises the chances of a cut – exacerbating the fall.

3) Better than estimated: A repeat of 1.7% may help GBP/USD stabilize, and a pickup in inflation could already send it higher. While that would be detrimental for consumers, it would lower the chances of a rate cut. This scenario is highly unlikely

Conclusion

UK inflation is set to decelerate in October, and these projections look fully justified. The downbeat figures and worsening political prospects create a bearish bias that may exacerbate the pound's falls. A considerable beat may be needed to boost sterling. 

More Death Cross Forms in EUR/GBP

Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility.

Analysis feed

Latest Forex Analysis

Editors’ Picks

EUR/USD turns down as Trump touts trade hopes, after Lagarde's debut

EUR/USD is trading below 1.1130 after President Trump tweeted that the US is getting close to deal with China. Earlier, the ECB left rates unchanged and President Lagarde acknowledged the recent upturn.

EUR/USD News

GBP/USD retreats further from nine-month highs, nears 1.3100

GBP/USD has extended its decline amid renewed EUR demand within ECB’s monetary policy announcement. UK elections weigh as polls show a further narrowing in Conservatives’ advantage.

GBP/USD News

“Brexit as last” will trigger a relief rally even if there is a hung Parliament

Conventional wisdom has it we get a sterling rally if he wins and gets a ruling majority, while getting a hung Parliament means a drop in the pound.

Read more

Gold volatile after ECB, Trump's comments

It has been a rollercoaster day for gold so far on Thursday as the precious metal advanced 1% during the London session, only to give up all the gains and turn to sharp losses later in the day.

Read more

USD/JPY: Greenback jumps to four-day highs as trade tension ease

USD/JPY broke above the 109.00 handle as Trump is upbeat on the trade deal. Resistance is seen at the 109.26 and 109.43 price levels.

USD/JPY News

Forex Majors

Cryptocurrencies

Signatures