Current UK CPI Rate & Its Effect on the British Pound

A number of economic indicators impact currencies and exchange rates, with the Consumer Price Index (CPI) being one of the most crucial when making currency-related decisions. In the United Kingdom, the Office for National Statistics (ONS) is responsible for releasing monthly CPI data, which provides valuable insights into the country’s economic health and its potential impact on the British pound (GBP).

The Current UK CPI Rate

Data from the ONS website shows a CPI rate of 2.0%, the same as it was exactly one year ago (YoY). Despite a fall in clothes prices, hotel, food, drink, and footwear costs, the CPI data indicates a steady inflation rate heading into August 2024. The prices of services across many industries also increased, reflecting the persistence of the inflation rate. The current UK CPI data also impacts forex trading, with the demand for the British pound (GBP) holding steady. It also aligns with the Bank of England’s (BoE) target inflation rate.

Drivers of CPI Rate

The services industry, unsurprisingly, held stubborn price growth with a steady inflation rate of 5.7% in June. Analysts pick the cost of services as one of the chief drivers of the UK’s inflation in 2024. Darren James, chief secretary to the Treasury, comments that “prices remain high” for families across Britain and that the government is “taking tough decisions” to address the issues. Hotels and restaurant prices are also critical drivers of the UK’s inflation, with the core inflation reaching 3.5% YoY.

The core CPI data provides more comprehensive insights into the economic situation by excluding the food and energy sectors, which traditionally have higher price volatility. Adjustments to CPI figures may trigger volatility in the forex market.

How the UK CPI Rate Affects the GBP Price

The UK CPI rate affects the price of the GBP by influencing other factors like interest rate and GDP, which influence the demand for a currency. Demand and supply control the relative values of currencies in global markets. Increased demand naturally drives prices higher as bulls gain control of the market.

The CPI is a significant indicator of inflation and influences the BoE’s monetary policy. A higher CPI rate may prompt the BoE to hike interest rates in the hopes of stimulating economic growth and the demand for the GBP in global markets. Investors, raiders, and companies engaged in international trade monitor CPI and interest rates to predict the exchange rate of the GBP to major currencies.

Lower CPI rates, which indicate lower inflation, may cause the BoE to lower the interest rate, weakening the pound in the process. Investors prefer currencies with higher interest returns and will naturally channel funds to those currencies. In the forex markets, the monthly CPI provides insight into a country’s economic health and pointers to where the market is headed. Forex markets are typically volatile when the ONS releases CPI data.

At the macro level, the CPI also impacts the broader gross domestic product (GDP) by changing consumer behaviour, affecting the purchasing power of individuals for goods and services, and influencing demand. When inflation is high, demand for goods and services may fall, prompting manufacturers to slow down production, hence a lower GDP. The GDP is another powerful economic indicator that influences the exchange rate of the GDP.

For the first time since 2021, the BoE hit its target level in May 2024 and has since maintained the rate. The current CPI rate suggests a steady growth pace for the UK economy, with inflation under control. This may prompt the Bank BoE to maintain current interest rates for some time before announcing the much-anticipated cuts later in the year.

Current Implications for GBP and GBP/USD Analysis

The GBP/USD pair is bullish, with the pound hitting a one-year high against the USD as June inflation rates were slightly above expectations. Analysts had predicted a CPI rate of 1.9% and a potential interest rate cut from the current 16-year high.

The GBP reached $1.3044 in its boldest move against the USD in 12 months. Following the release of the CPI data on Wednesday, 17 July 2024, the GBP pair traded at 0.08% higher on the day. The pair shows strong bullish momentum, with the RSI confirming potential targets at 1.3050 and 1.3100 despite being overbought over 70. Investors have psychological support at 1.2894/2860 but may turn to resistance if the price pushes lower. The GBP’s bullish momentum is partly due to the USD’s recent slump caused by weak CPI data.

King Charles III delivered his speech to the Parliament on Wednesday, 17 July, unveiling the plans for the new Labour-led government. The GBP gained slightly following PM Keir Starmer’s victory two weeks ago. Still, the GBP has maintained a steady uplift from there as investors grow confident about potential reforms, especially in homebuilding and infrastructure projects. King Charles III also addressed the plans for transportation and energy, with Starmer formalising plans for Britain’s rail network and a renewable energy company owned by the British public.

The markets remain calm following King’s speech, but investors will be keen on changes that improve the GDP and slow down inflation in the second half of the year.

Impact of Current UK CPI Rate on the British Pound

The UK’s current CPI rate of 2.0% reflects a stable economic environment that aligns with the Bank of England’s target inflation rate. This stability has positively impacted the British pound, particularly against the U.S. dollar, with the GBP/USD pair showing bullish momentum. Moving forward, the government’s proposed reforms and the Bank of England’s monetary policy decisions will be crucial in maintaining this economic stability and potentially strengthening the pound further.