United Kingdom CPI inflation jumps to 2.9% YoY in July, as expected

The United Kingdom (UK) headline Consumer Price Index (CPI) climbed 2.9% over the year in July, compared to a rise of 2.6% in June, the data released by the Office for National Statistics (ONS) showed on Wednesday. 

Markets predicted a 2.9% growth in the reported period. The UK inflation reading was well above the Bank of England’s (BoE) 2% inflation target.

The core CPI (excluding volatile food and energy items) rose 2.6% year-over-year (YoY) in the same period, compared to June’s 2.6% print and came in hotter than the forecast of 2.5%.

Meanwhile, the monthly UK CPI arrived at 0.3% in July versus an increase of 0.1% reported in June, in line with the market consensus of 0.3%.

GBP/USD reaction to the UK CPI inflation data

The British Pound (GBP) edges slightly higher in an immediate reaction to the UK inflation report. At the time of writing, the GBP/USD pair is trading 0.08% higher on the day to trade at 1.3545.

This section below was published at 02:00 GMT as a preview of the UK Consumer Price Index (CPI) inflation data.

• The United Kingdom’s Office for National Statistics will publish the July CPI data on Wednesday.
• Annual UK headline inflation is set to pick up in July, while core CPI is expected to cool slightly.
• The UK CPI report is set to rock the British Pound as bets on a September interest-rate hike by the BoE build.

The United Kingdom (UK) Office for National Statistics (ONS) will release the high-impact Consumer Price Index (CPI) report for July at 06:00 GMT. 

The inflation data could significantly affect market expectations for a Bank of England (BoE) interest rate hike in September, stirring volatility in the British Pound (GBP) as traders assess the impact of energy price swings driven by the Middle East war.

What to expect from the next UK inflation report?

The UK Consumer Price Index is expected to rise 2.9% year-over-year (YoY) in July, up from 2.5% in June. If the reading comes as anticipated by economists, it would be the highest in four months and surpass the BoE’s forecast of 2.8%, moving further away from its 2% target.

Core CPI inflation, which strips out energy, food, alcohol, and tobacco prices, is expected to ease slightly to 2.5% YoY in the reported period.

According to industry experts, official data is expected to show that service inflation, a key measure for BoE policymakers, arrived at 3.4% YoY in July.

Meanwhile, the British monthly CPI is seen rising by 0.3% in the same period after a 0.1% growth in June.

How will the UK Consumer Price Index report affect GBP/USD?

Amid signs of a disinflationary trend in the UK, the upcoming CPI data will be critical to gauging whether the trend is reversing and significant enough to nudge the BoE to consider an interest rate hike at its September 17 monetary policy meeting.

It’s the inflation print covering the month of the renewed outbreak of hostilities in the Middle East, which lifted Oil prices up by roughly 22%. Therefore, an uptick in headline British inflation, both monthly and annual, may not come as a surprise.

However, it remains to be seen whether the pick-up in inflation will likely sustain amid still elevated Oil prices, as US President Donald Trump said he has ruled out extending the Iran ceasefire deal.

This matters as BoE Governor Andrew Bailey said in his post-monetary policy meeting press conference in July that "if the Mideast conflict persists and we get second-round effects, we will likely need to raise rates.”

The July Monetary Policy Statement (MPS) read that "risks to inflation forecasts are tilted to upside, but scope remains for outlook to change materially depending on Iran war,” adding that "policy could need to react before inflation persistence risks materialise conclusively."

Back in July, Bailey and company left rates unchanged at 3.75% for the fifth consecutive meeting, as expected. However, the Monetary Policy Committee (MPC) voted 6-3 to hold rates, a more divisive vote than the 7-2 split ​predicted. 

Let’s analyse two main potential scenarios for the UK CPI release.

Hotter-than-expected annual and monthly core CPI readings could lift the odds of a rate hike in September, as markets could view it as an insurance hike by the British central bank. In such a case, the Pound Sterling will receive fresh impetus, likely driving GBP/USD back above 1.3600.

Conversely, a surprise cool-off in core inflation could push back against BoE rate hike bets, checking the pair’s recent uptrend and fuelling a corrective pullback.

Dhwani Mehta, Asian Session Lead Analyst at FXStreet, offers a brief technical outlook for the major and explains: “GBP/USD holds a bullish near-term bias as spot remains comfortably above the major daily simple moving averages (SMA) clustered between roughly 1.3380 and 1.3440, suggesting a well-supported uptrend rather than a mere short-covering bounce. The 14-day Relative Strength Index at 62 hints that buyers still retain control.

On the downside, initial support is seen at the confluence zone of the 21-day, 100-day, and 200-day SMAs around 1.3420, forming a dense demand band just below. A deeper pullback would expose the 50-day SMA support at 1.3381, where dip-buying interest would be expected to emerge. Alternatively, recapturing the 1.3600 psychological level is critical to sustaining a meaningful uptrend. The next topside target is seen at the May high of 1.3658,” Dhwani adds.