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. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers.

Analysis feed

FXStreet Trading Signals now available!

Access to real-time signals, community and guidance now!

Latest Analysis


Latest Forex Analysis

Editors’ Picks

EUR/USD flirts with daily lows sub-1.1400

The EUR/USD pair is down to daily lows mid-US afternoon, as the dented market’s mood lifts the dollar. Upbeat US data and an on-hold ECB failed to impress investors.

EUR/USD News

GBP/USD returns to 1.2550 comfort zone

The GBP/USD pair keeps retreating from daily highs, now trading flat for the day around 1.2550. UK employment data came in better-than-anticipated but fell short of boosting sterling.

GBP/USD News

Gold prices walking a tightrope over 1,800 psychological level

Gold prices are trading a touch below the psychological $1,800 level in markets that have consolidated in a sea of fundamentals as traders await the next cue.

Gold News

Why is the crypto market falling today?

War for dominance impacts the market and heralds several days of turbulence. Fight between Bitcoin and Ethereum hurts the Altcoin segment, which is largely overbought after weeks of euphoria. Ripple is the most affected of the Top 3 and steps back into a high-risk environment.

Read more

Oil : The price action seems indecisive at these elevated levels

WTI is still in a bull trend on the chart below but at these elevated levels, it seems the price seems to be very jittery. Previously within this trend when the price moved higher the size of the bullish candles was bigger. 

Oil News

Forex Majors

Cryptocurrencies

Signatures