The data released on Wednesday on UK inflation growth put underlying pressure on the British currency. Almost all components of the report came in either at forecast levels or in the red zone, reflecting a slowdown across many indicators. However, it cannot be said that the release was a "death sentence" for the British currency, not at all. Inflation in the service sector remains unacceptably high for the Bank of England, which has helped GBP/USD buyers stay afloat.
According to the published data, the overall consumer price index (CPI) decreased by a projected 0.5% month-on-month (a multi-year low). Year-on-year, the overall CPI is projected to slow to 3.0% from the previous 3.4%. This is the slowest growth rate since March of last year.
The core consumer price index declined to 3.1%. On one hand, this is a multi-year record—the lowest value since September 2021. On the other hand, most analysts had forecast a more significant drop to 3.0%.
The retail price index (RPI), which employers use in discussions about wage issues, fell into the red zone. Contrary to expectations of a month-on-month decline to -0.3%, the indicator fell to -0.5% (a multi-year record). Year-on-year, the RPI decreased to 3.8% from 4.2% (with a forecast of 4.0%).
The producer price index decreased to -0.2% year-on-year (with a forecast increase to 0.3%), while the producer price index for finished goods slowed to 2.5% year-on-year (a third consecutive month of downward trend).
As we can see, a quite unambiguous picture emerges here—inflation is slowly, gradually, but still decelerating. Against this backdrop, the market is once again discussing the prospects of a rate cut by the Bank of England at the March meeting (which, in fact, is why the pound was under pressure).
However, in my opinion, such "dovish" conclusions are premature. On the one hand, inflation is indeed slowing, in line with the central bank's forecasts. Following the February meeting, the Bank of England stated that price pressure in the UK would ease to 3.0% in the first quarter and to a level closer to 2% in the second quarter.
On the other hand, year-on-year CPI in the service sector is stubborn: this component of the report stood at 4.4%, significantly exceeding the central bank's forecast (4.1%), signaling persistent core inflation. Essentially, this is the main indicator of "internal" inflationary pressure (hotels, transport, healthcare, education, financial services). Therefore, the dynamics of this component are crucial for the Bank of England.
Suppose services start to decline sustainably to a range of 3.5-3.8%. In that case, the central bank will undoubtedly resort to another round of rate cuts—at least, CPI in the service sector will not pose an obstacle. But the 4.4% level is inconsistent with the medium-term 2% inflation target. Thus, the prospects for a cut in March look, to put it mildly, unclear.
Note that despite the "red hue" of the inflation report, the pound in the pair with the dollar has regained some of the positions lost on Tuesday. On Tuesday, the GBP/USD pair sold off after the UK labor market report was released. Such a reaction was justified: the unemployment rate rose to 5.2%, wage growth slowed to 4.2%, and the number of unemployment benefit claims increased by almost 30,000 (28,600)—the highest value since spring 2020.
Reacting to such an openly disappointing result, the GBP/USD pair fell to the base of the 35th figure, renewing nearly a month-long price low. On Wednesday, however, the pair regained some of its lost ground, despite the slowdown in CPI. Metaphorically speaking, inflation in the service sector has become a "spoonful of honey in a barrel of tar" for GBP/USD buyers. Thanks to this component, the pair remained afloat and drifted in the middle of the 35th figure.
Thus, it is reasonable to consider short positions only after sellers overcome the support level of 1.3510 and—importantly—establish themselves below this level, meaning they need to settle in the area of the 34th figure. Tuesday's attempt, as we see, failed.
From a technical standpoint, the GBP/USD pair is positioned between the middle and upper lines of the Bollinger Bands indicator, below the Tenkan-sen and Kijun-sen lines, but above the Kumo cloud. The support level is the aforementioned mark of 1.3510 (the lower line of the Bollinger Bands on the daily chart). The resistance level is 1.3600 (the middle line of the Bollinger Bands on the same timeframe).
