• The UK Consumer Price Index (CPI) is forecast to rise at a steady rate of 2.2% until August.
• The Bank of England will announce its monetary policy decision on Thursday.
• Sterling is technically bullish and could break above 1.3300.

The UK Office for National Statistics (ONS) will publish Consumer Price Index (CPI) data for August on Wednesday. CPI inflation is one of the main factors on which the Bank of England (BoE) bases its monetary policy decision, meaning the data is seen as a major factor influencing the pound sterling (GBP).

The BoE met in August and decided to cut its benchmark interest rate by 25 basis points (bps) to 5%, a decision supported by a narrow majority of 5 out of 9 voting members of the Monetary Policy Committee (MPC). The widely anticipated announcement had a negative impact on GBP, which entered a selling spiral against the US dollar, causing the GBP/USD pair to hit a low of 1.2664 a few days after the event.

What to expect from the next UK inflation report?

UK CPI is expected to have risen at an annual rate of 2.2% in August, matching July’s reading. The headline annual reading is forecast to be 3.5%, up from the previous 3.3%. Finally, the monthly index is expected to rise 0.3% after falling 0.2% in July.

It is worth noting that the BoE will announce its monetary policy on Thursday and that inflation levels could influence policymakers’ decision. Ahead of the announcement, financial markets had been predicting that officials would keep interest rates on hold before adopting a more aggressive stance from November. The central bank had predicted that inflation could reach 2.75% in the coming months before gradually withering and even falling below its 2% target in 2025.

Meanwhile, the BoE released its quarterly survey of public inflation expectations last week, which showed inflation over the next 12 months was set to fall to 2.7%, the lowest level in three years. However, the five-year outlook was slightly raised to 3.2% from 3.1% in May. Those figures support the case for keeping interest rates on hold, as does the expected CPI reading.

Finally, it is worth noting that the UK entered a technical recession in the last quarter of 2023. The economy has since recovered, but growth has been tardy and the risk of another setback remains.

In such a scenario, a diminutive deviation from the expected data could have restricted impact on sterling. Higher than expected readings could dampen hopes for aggressive rate cuts, but the path is clear. The BoE will cut rates and there is no room for a hike. Moreover, market participants do not expect the BoE to cut when it meets later this week, which would likely limit the potential impact on the currency.

When will the UK Consumer Price Index report be released and what impact could it have on the GBP/USD pair?

The UK Office for National Statistics will publish August CPI data on Wednesday at 06:00 GMT. Before looking at potential scenarios, there is one more thing to consider: although core inflation has been hovering around the central bank’s target, services inflation has been fairly high for most of the year, at above 5%, more than twice core inflation.

As said, a modest rise in inflation could be seen as a modest rate cut, but that won’t surprise investors enough to consider the opposite scenario. On the contrary, a weaker-than-expected result with easing services inflation should fuel hopes for more aggressive rate cuts and put sterling under powerful selling pressure.

Valeria Bednarik, FXStreet’s Chief Analyst, notes: “The GBP/USD pair is heading into an event, trading above the 1.3200 level, and not far from the multi-month high of 1.3265 seen in August. Most of the pair’s strength is coming from the overall weakness of the US dollar, as the Federal Reserve (Fed) is likely to make its first interest rate cut on Wednesday. The Fed event is likely to overshadow the UK CPI release as market participants wait for the US central bank’s announcement to take positions.”

Technically speaking, Bednarik adds, “GBP/USD is bullish on the technical readings on the daily chart. A breakout of the aforementioned August high could lead to a quick test of the 1.3300 level, and after breaking above the latter, the rally could continue towards 1.3360. A daily close above the 1.3300 threshold would support a steady rally in the coming days. On the other hand, the pair would need to break below the 1.3140 region to threaten the bullish scenario. In such a case, the next level to watch and a potential bearish target is 1.3000.”