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GBP Breaking News: UK Inflation Hotter Than Expected, BOE to Remain Hawkish

GBP Breaking News: UK Inflation Hotter Than Expected, BOE to Remain Hawkish

Zain Vawda, Analyst

UK CPI Key Points:

  • The Yearly UK CPI Rose 10.1% Annually, above a Consensus Forecast of 9.8% and up from 9.4% in June.
  • Rising Food Prices Made the Largest Upward Contribution to Annual Inflation Rates between June and July.
  • The Bank of England Expects Inflation to Top Out at 13.3% in October.

The CPI and Forex: How CPI Data Affects Currency Prices

UK inflation accelerated in July beating estimates and underscoring relentless price pressures. The print ramps up the squeeze on consumers while adding to existing pressure for action from the government and Bank of England.

The Consumer Prices Index rose 10.1% in July from a year earlier after a 9.4% gain the month before, the Office for National Statistics said Wednesday. Economists had expected a reading of 9.8%.The Bank expects inflation to top out at 13.3% in October. Conservative Party leadership candidates Liz Truss and Rishi Sunak, one of whom will succeed Boris Johnson as prime minister on September 5 after a poll of party members, are under increasing pressure to offer radical solutions to the country’s historic cost-of-living crisis.

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The Bank of England is in a tough spot as the US Federal Reserve continues its hiking cycle. Higher energy prices are one of the main reasons why the rate of inflation is so high. Russia’s invasion of Ukraine has led to more large increases in the price of gas. Since May, the price of gas has doubled. According to the BoE estimates those price rises will push inflation even higher over the next few months, to around 13%.

Economists are growing increasingly pessimistic about the UK, with the risk of a recession now seen as far more likely than not and interest rates expected to go higher than previously thought. The inflation print comes on the back of Yesterday’s July UK employment data which was somewhat of a mixed bag.UK job vacancies fell for the first time since August 2020 with real wages declining at the sharpest pace on record, indicating a tightening inflation squeeze on consumers and businesses. Looking ahead the prospects are less bright, with the BOE predicting unemployment will rise to over 6% as the cost-of-living crisis weighs on the economy. According to a Bloomberg survey, the probability of a recession is now estimated at 75%, up sharply from 44% in early July and higher than any time since September 2020 when the pandemic was raging.

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The half-point rate rise announced on Aug. 4 is expected to be followed by a similar increase in September with a subsequent quarter-point hike in November, which will take the BoE benchmark to 2.5%, above the previously forecast peak of 2%. Money markets are pricing in rates above 3% by February.

Market reaction

GBPUSD Daily Chart

gbpusd daily chart

Source: TradingView, prepared by Zain Vawda

Initial reaction was relatively subdued with a 30pip spike higher for GBPUSD before pulling back and trading lower. Since approaching the key psychological 1.20 level (lined up with 61.8% fib level) yesterday we saw a rally of some 120 pips before the CPI print filtered through. We have been ranging between the 1.200-1.225 since July 25th with a breakout anytime soon not looking likely. Price action is indecisive as well indicated by a lack of structure (either bullish or bearish) as sentiment continually shifts.

Key Intraday Levels Worth Watching:

Support Areas

  • 1.2050 (0.50% fib level)
  • 1.2000 (key psychological level)

Resistance Areas

  • 1.2180 (23,6 fib level)
  • 1.2250 (key psychological level)

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--- Written by Zain Vawda for DailyFX.com

Contact and follow Zain on Twitter: @ zvawda

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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