The GBP/USD exchange rate stabilized on Wednesday after the UK published encouraging consumer inflation data. It rose slightly for the third consecutive day to trade at 1.2200, up slightly from the year-to-date low of 1.2095. So, what does the UK inflation mean for sterling, and how will it react to the upcoming US inflation report?
More Bank of England cuts
UK’s inflation softened in December, opening the door for more interest rate cuts this year. According to the Office of National Statistics (ONS), the headline Consumer Price Index (CPI) dropped from 2.6% in November to 2.5% in December, lower than the median estimate of 2.6%.
Core inflation dropped from 3.5% to 3.2%, also lower than the expected 3.4%. These numbers rose slightly to 0.3% on a MoM basis, also lower than the median estimate of 0.4% and 0.5%.
These numbers mean that, while UK’s inflation is high, the trajectory has improved. With the slow economic growth, the implication is that the Bank of England (BoE) will continue cutting interest rates in the next few months.
The BoE has been more cautious than the Federal Reserve and the European Central Bank (ECB) since it has implemented just two interest rate cuts. As a result, the UK has interest rates of 4.75%, higher than in the US and the European Union.
This trajectory means that the bank has more room to cut, especially if inflation continues on its current trend.
Still, there is a risk that stickier prices will stay as companies boost prices in response to the labor government’s policies.
UK bond yields slipped slightly after the latest inflation report, while stocks were barely moved as investors waited for the upcoming earnings season.
US inflation data ahead
The GBP/USD pair wavered after the UK inflation data because they came a few hours before the US published its inflation report.
Analysts expect these numbers to set the tone for what to expect from the Federal Reserve later this year.
Most economists believe that inflation faces major tailwinds ahead such as the ongoing fires in Los Angeles and the upcoming Trump administration.
The California fires will raise prices on household items, housing, insurance, and other items as people start to rebound.
Meanwhile, Trump has pledged to implement some policies that could stir inflation in the coming months. Some of these policies are on mass deportations, tariffs, and low taxes.
Economists expect the upcoming data to show that core inflation remained at 3.3%, while the headline CPI rose to 2.9%. In a note, Francesco Pesole, an ING analyst, said:
“Even if tariffs are hiked gradually, markets may not be as optimistic as Trump’s team that inflation can be controlled. A hot CPI today could easily get investors jittery on the inflation topic before tariffs are even considered.”
GBP/USD technical analysis
GBP/USD chart | Source: TradingView
The daily chart shows that the GBP/USD exchange rate has crashed because of the strong US dollar index. It crashed to a low of 1.2097, its lowest level since 2023.
The pair has remained below the 50-day and 25-day Exponential Moving Averages, a sign that bears are in control for now. Also, it has dropped below the important support level at 1.2300, its lowest level in April 2024.
Most importantly, the pair is slowly forming a bearish flag or pennant pattern, which may soon lead to more downside. If this happens, the next point to watch will be the psychological point at 1.200, which is about 1.7% below the current level.
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