British Pound (GBP) Price Outlook: GBP/USD Rally Possible Despite Weak UK Inflation

GBP price, UK inflation news and analysis:

• GBP/USD eased back Wednesday after UK inflation data came in lower than expected but soon rallied, suggesting the pair could now bounce back after its losses so far this month.
• Note that producer price index numbers were above predicted levels, providing further evidence that UK inflation will likely rise in the months ahead.

GBP/USD bounce possible after recent losses

GBP/USD edged down Wednesday after UK inflation data for last month came in under economists’ estimates, with the headline inflation rate year/year dropping to 2.0% compared with June’s 2.5% and the forecast 2.3%.

However, a rally soon followed, perhaps reflecting higher than forecast producer price index (PPI) numbers that showed both raw material prices and factory gate prices rising faster than predicted both month/month and year/year.

UK inflation report

Source: DailyFX economic calendar

The PPI data point to higher consumer price index (CPI) numbers further down the line and the statistics overall are therefore unlikely to change expectations that the Bank of England will raise UK Bank Rate next year. The markets are fully pricing in a 25 basis points increase by March and another 25bp increase by September as the Bank sees inflation peaking at 4% before dropping back.

This is all broadly positive for GBP/USD, which is therefore well placed to recover at least some of the losses since its recent high at 1.3984 recorded on July 30.

GBP/USD Price Chart, Hourly Timeframe (July 29 – August 18, 2021)

Source: IG (You can click on it for a larger image)

Note, though, that the trendline which recently acted as support for the pair is now resistance, and GBP/USD will have to break convincingly above it if the rally is to gain momentum.

--- Written by Martin Essex, Analyst

Feel free to contact me on Twitter @MartinSEssex