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GBP/USD Rate Rally Susceptible to Slowdown in UK CPI

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British Pound Talking Points

Fresh data prints coming out of the UK may undermine the recent rally in GBP/USD as the update to the Consumer Price Index (CPI) is anticipated to show a slowdown in the core rate of inflation.

Fundamental Forecast for British Pound: Neutral

GBP/USD extends the advance following the US Consumer Price Index (CPI) to trade to a fresh monthly high (1.3773), and current market conditions may push the exchange rate towards the September high (1.3913) as mixed data prints coming out of the US economy undermines speculation for an imminent shift in Federal Reserve policy.

Looking ahead, fresh developments coming out of the UK may influence GBP/USD as the Bank of England (BoE) warns that “global cost pressures have continued to affect UK consumer goods prices,” and signs of sticky inflation may put pressure on the central bank to switch gears as “some modest tightening of monetary policy over the forecast period was likely to be necessary to be consistent with meeting the inflation target sustainably in the medium term.

GBP/USD Rate Rally Susceptible to Slowdown in UK CPI

As a result, the update to the UK CPI may reinforce the BoE’s hawkish outlook as the headline reading for inflation is expected to hold steady at 3.2% per annum in September, but a downtick in the core reading may drag on the British Pound as it provides Governor Andrew Bailey and Co. greater scope to retain the current course for monetary policy.

In turn, a batch of mixed data prints may generate a limited reaction in GBP/USD as the BoE’s “central expectation continues to be that current elevated global cost pressures will prove transitory,” but a marked slowdown in the UK CPI may derail the recent recovery in the exchange rate as the Monetary Policy Committee (MPC) pledges to “focus on the medium-term prospects for inflation, rather than factors that are likely to be transient.

With that said, signs of sticky UK price growth may keep GBP/USD afloat as the MPC adopts a hawkish forward guidance for monetary policy, but evidence of slower inflation may produce headwinds for the British Pound as it dampens speculation for an imminent shift in BoE policy.

— Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong