UK inflation drops more than expected to 3.9% in November

United Kingdom CPI rose 3.9% YoY in November vs. 4.4% forecast.
Monthly British inflation dropped to -0.2% in November vs. 0.1% estimate.
GBP/USD drops below 1.2700 on UK CPI inflation data.

The United Kingdom's (UK) Consumer Price Index (CPI) increased 3.9% over the year in November, down from a 4.6% rise seen in October, according to the latest data published by the Office for National Statistics (ONS) on Wednesday. Markets expected an acceleration of 4.4%.

The Core CPI (excluding volatile food and energy items) rose 5.1% YoY in November when compared to a 5.7% growth in October and below expectations of 5.6%.

Meanwhile, the UK Consumer Price Index dropped 0.2% MoM in November vs. the expected 0.1% increase and October’s 0% print.

GBP/USD reaction to the UK CPI inflation data

GBP/USD saw a fresh selling-wave on the downbeat UK CPI data, dropping below 1.2700. The pair is falling 0.60% on the day to trade at 1.2650, as of writing.

GBP/USD: 15-minutes chart

(This story was corrected on December 20 at 07:09 GMT to say that UK CPI inflation eases further to 3.9% in November vs. 4.4% forecast, not 4.8% forecast)

Pound Sterling price today

The table below shows the percentage change of Pound Sterling (GBP) against listed major currencies today. Pound Sterling was the weakest against the Japanese Yen.

	USD	EUR	GBP	CAD	AUD	JPY	NZD	CHF
USD		0.23%	0.41%	0.10%	-0.07%	-0.18%	-0.13%	0.04%
EUR	-0.23%		0.18%	-0.14%	-0.32%	-0.42%	-0.39%	-0.23%
GBP	-0.41%	-0.17%		-0.32%	-0.48%	-0.60%	-0.53%	-0.37%
CAD	-0.09%	0.14%	0.31%		-0.19%	-0.28%	-0.25%	-0.11%
AUD	0.10%	0.32%	0.50%	0.18%		-0.10%	-0.07%	0.09%
JPY	0.19%	0.44%	0.58%	0.29%	0.12%		0.02%	0.18%
NZD	0.16%	0.39%	0.56%	0.26%	0.08%	-0.03%		0.20%
CHF	-0.01%	0.23%	0.42%	0.10%	-0.09%	-0.19%	-0.14%

The heat map shows percentage changes of major currencies against each other. The base currency is picked from the left column, while the quote currency is picked from the top row. For example, if you pick the Euro from the left column and move along the horizontal line to the Japanese Yen, the percentage change displayed in the box will represent EUR (base)/JPY (quote).

This section below was published at 23:15 GMT on Tuesday as a preview of the UK inflation data.

The all-important UK CPI report will be published by the Office for National Statistics on Wednesday.
Headline and core annual inflation are likely to extend their declining trend.
The UK CPI data is set to ramp up end-of-the-year volatility around the Pound Sterling.

Following last week’s hawkish hold by the Bank of England (BoE), the high-impact Consumer Price Index (CPI) data from the United Kingdom on Wednesday will hold the key for the next directional move in the Pound Sterling. The data will be published by the Office for National Statistics (ONS) at 07:00 GMT.

What to expect from the next UK inflation report?

The headline annual UK Consumer Price Index is forecast to rise 4.4% in November, slowing slightly from October’s 4.6% increase. The data would continue to sit at its lowest since October 2021 while more than double the BoE’s 2.0% target.

The Core CPI inflation is seen declining to 5.6% YoY in November, as against a 5.7% reading in October. Meanwhile, Britain’s CPI is expected to rise 0.1% over the month, having reported no growth in October.

Analysts at TD Securities (TDS) cited key reasons behind the likely easing in the headline inflation data, noting that “a 2% m/m decline in petrol prices and heavy base effects in the food component should help pull headline inflation down 0.3ppts. Services inflation will remain key for the BoE, and we expect it to fall to 6.5% y/y—0.4ppts below the BoE's forecast.”

In its December policy statement, the BoE said that “CPI inflation has fallen back broadly as expected, while there has been some downside news in private sector regular Average Weekly Earnings (AWE) growth. However, key indicators of UK inflation persistence remain elevated.”

In light of this, “the Committee continues to judge that monetary policy is likely to need to be restrictive for an extended period of time,” the statement said.

The BoE held the policy rate at a 15-year high of 5.25% following its December meeting and offered no pivot. But the grim economic outlook and loosening labor market conditions led money markets to price in four 25 bps rate cuts starting from June, with the key rate seen slashing from 5.25% to as low as 4.25% by the end of 2024.

Therefore, the upcoming UK inflation data is critical to gauging the timing of the central bank’s policy pivot next year, which could have a significant impact on the value of the Pound Sterling.

When will the UK Consumer Price Index report be released and how could it affect GBP/USD?

The UK CPI data will feature at 07:00 GMT on Wednesday. The Pound Sterling is looking to build on its recovery above 1.2200 against the US Dollar in the lead-up to the high-impact United Kingdom’s inflation data. The reinforcement of the hawkish rhetoric from the US Federal Reserve (Fed) officials is helping keep the US Dollar afloat.

An unexpected uptick in the headline and core inflation data could douse hopes for a BoE pivot as early as June, reviving the upswing in the Pound Sterling. In such a case, GBP/USD could revert toward the four-month high of 1.2794. On the contrary, GBP/USD could likely resume its correction toward 1.2500 if the UK CPI data cools down more than expected and affirms the market’s pricing of BoE rate cuts next summer.

Dhwani Mehta, Asian Session Lead Analyst at FXStreet, offers a brief technical outlook for the major and explains: “The GBP/USD pair is likely to stay hopeful as long as it holds above the 21-day Simple Moving Average (SMA) at 1.2616. The 14-day Relative Strength Index (RSI) is holding comfortably above the midline, pointing to more upside.”

“A firm break above Monday’s high of 1.2704 could reinforce the buying interest around the Pound Sterling. The next upside barrier is seen at the 1.2750 psychological level, above which the door will reopen for a test of the multi-month high of 1.2794. Conversely, a daily closing below the 21-day SMA at 1.2616 could trigger a fresh downswing toward the 200-day SMA at 1.2508, which could act as a solid cushion,” Dhwani adds.

Economic Indicator

United Kingdom Consumer Price Index (YoY)

The United Kingdom (UK) Consumer Price Index (CPI), released by the Office for National Statistics on a monthly basis, is a measure of consumer price inflation – the rate at which the prices of goods and services bought by households rise or fall – produced to international standards. It is the inflation measure used in the government’s target. The YoY reading compares prices in the reference month to a year earlier. Generally, a high reading is seen as bullish for the Pound Sterling (GBP), while a low reading is seen as bearish.

Why it matters to traders

The Bank of England is tasked with keeping inflation, as measured by the headline Consumer Price Index (CPI) at around 2%, giving the monthly release its importance. An increase in inflation implies a quicker and sooner increase of interest rates or the reduction of bond-buying by the BOE, which means squeezing the supply of pounds. Conversely, a drop in the pace of price rises indicates looser monetary policy. A higher-than-expected result tends to be GBP bullish.

Inflation FAQs

What is inflation?

Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.

What is the Consumer Price Index (CPI)?

The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.

What is the impact of inflation on foreign exchange?

Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.

How does inflation influence the price of Gold?

Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it.
Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.

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