Inflation warning! CPI may explode, shattering the Bank of England's interest rate cut dream?
2025-09-17 13:48:24
The UK Office for National Statistics (ONS) will release its August Consumer Price Index (CPI) data at 2:00 PM Beijing time on Wednesday, September 17th. This highly market-influential data is likely to significantly influence the Bank of England's monetary policy direction and the performance of the British pound, ahead of its interest rate decision on Thursday.
What are the market expectations for the UK inflation report?
The UK's CPI is expected to rise to 3.9% year-on-year in August from 3.8% in July. Although this reading is in line with the Bank of England's forecast, it is still nearly double its 2.0% target.
Core CPI inflation, which excludes energy, food, alcohol and tobacco prices, is expected to slow to 3.6% in August from 3.8% in July.
Official data is expected to show services inflation remains well above the Bank of England’s 2% target, with the year-on-year increase in August expected to be 4.8% (up from 5.0% previously), according to a Bloomberg survey of economists.
In addition, the UK's seasonally adjusted CPI is expected to rise 0.3% month-on-month in August, accelerating from the 0.1% increase in July.
"We expect a mixed CPI report, with core inflation below consensus but in line with the Monetary Policy Report forecast, and headline inflation forecast at 3.9% y/y, slightly above market and Bank of England expectations," TD Securities analysts said in a note ahead of the data release.
How will the UK CPI report affect GBP/USD?
A slight rise in UK inflation expectations and a cooling labor market are likely to determine the Bank of England's interest rate path after it is expected to remain on hold in September. The latest UK labor force data from the Office for National Statistics showed that annual growth in regular wages, excluding bonuses, slowed from 5% to 4.8% in the three months to July, while the unemployment rate remained unchanged at 4.7%, both in line with market expectations.
At the same time, most economists expect a 25 basis point rate cut in the first quarter of next year, and market bets on a November rate cut have increased. At its August monetary policy meeting, the Bank of England lowered its base rate to 4%, but after an unprecedented second round of voting, the resolution was passed with a narrow margin of 5 to 4.
The BoE reiterated its guidance for a "gradual and cautious approach" to further reductions in borrowing costs, but added that "monetary policy has become less restrictive with the policy rate cut."
Therefore, if the headline inflation figure comes in above expectations, it would dampen expectations of a rate cut this year. In this scenario, the British pound could receive a much-needed boost, pushing GBP/USD towards the 1.3700 level. Conversely, if the annual CPI unexpectedly slows, it could increase the probability of a rate cut in November, severely suppressing the pair's performance.
Dhwani Mehta, chief analyst at FXStreet, gave a brief technical outlook for the currency pair: "GBP/USD is currently trading at a two-month high above 1.3600, with the 14-day relative strength index (RSI) momentum indicator pointing upwards above the 50 level."
“The pair needs to break through the psychological level of 1.3650 to extend the rally towards the 1.3700 threshold. The next upside target is the July high of 1.3789. On the other hand, initial support is located near 1.3550, if it fails, it may fall to the 21-day simple moving average (SMA) at 1.3512. Further support is seen at the confluence of the 50-day (1.3464) and 100-day SMA (1.3474) around 1.3470, which will be the last line of defense for buyers.”
(GBP/USD daily chart, source: Yihuitong)
At 13:47 Beijing time, the pound sterling was trading at 1.3644/45 against the US dollar.
What are the market expectations for the UK inflation report?
The UK's CPI is expected to rise to 3.9% year-on-year in August from 3.8% in July. Although this reading is in line with the Bank of England's forecast, it is still nearly double its 2.0% target.
Core CPI inflation, which excludes energy, food, alcohol and tobacco prices, is expected to slow to 3.6% in August from 3.8% in July.
Official data is expected to show services inflation remains well above the Bank of England’s 2% target, with the year-on-year increase in August expected to be 4.8% (up from 5.0% previously), according to a Bloomberg survey of economists.
In addition, the UK's seasonally adjusted CPI is expected to rise 0.3% month-on-month in August, accelerating from the 0.1% increase in July.
"We expect a mixed CPI report, with core inflation below consensus but in line with the Monetary Policy Report forecast, and headline inflation forecast at 3.9% y/y, slightly above market and Bank of England expectations," TD Securities analysts said in a note ahead of the data release.
How will the UK CPI report affect GBP/USD?
A slight rise in UK inflation expectations and a cooling labor market are likely to determine the Bank of England's interest rate path after it is expected to remain on hold in September. The latest UK labor force data from the Office for National Statistics showed that annual growth in regular wages, excluding bonuses, slowed from 5% to 4.8% in the three months to July, while the unemployment rate remained unchanged at 4.7%, both in line with market expectations.
At the same time, most economists expect a 25 basis point rate cut in the first quarter of next year, and market bets on a November rate cut have increased. At its August monetary policy meeting, the Bank of England lowered its base rate to 4%, but after an unprecedented second round of voting, the resolution was passed with a narrow margin of 5 to 4.
The BoE reiterated its guidance for a "gradual and cautious approach" to further reductions in borrowing costs, but added that "monetary policy has become less restrictive with the policy rate cut."
Therefore, if the headline inflation figure comes in above expectations, it would dampen expectations of a rate cut this year. In this scenario, the British pound could receive a much-needed boost, pushing GBP/USD towards the 1.3700 level. Conversely, if the annual CPI unexpectedly slows, it could increase the probability of a rate cut in November, severely suppressing the pair's performance.
Dhwani Mehta, chief analyst at FXStreet, gave a brief technical outlook for the currency pair: "GBP/USD is currently trading at a two-month high above 1.3600, with the 14-day relative strength index (RSI) momentum indicator pointing upwards above the 50 level."
“The pair needs to break through the psychological level of 1.3650 to extend the rally towards the 1.3700 threshold. The next upside target is the July high of 1.3789. On the other hand, initial support is located near 1.3550, if it fails, it may fall to the 21-day simple moving average (SMA) at 1.3512. Further support is seen at the confluence of the 50-day (1.3464) and 100-day SMA (1.3474) around 1.3470, which will be the last line of defense for buyers.”
(GBP/USD daily chart, source: Yihuitong)
At 13:47 Beijing time, the pound sterling was trading at 1.3644/45 against the US dollar.
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