Sterling failed to post another day of gains and declined notably during the UK session as investors sold the British currency following the domestic inflation data.
UK inflation surprises to the downside
On Wednesday, the UK Office of National Statistics (ONS) stated that the annualized Consumer Prices Index (CPI) for the United Kingdom came in at 10.1%, compared to 10.5% in December, but falling short of expectations of 10.3%. The indicator continues to move away from its highest level since January 1981, 11.1%, which was recorded last year.
The Core CPI index (excluding volatile food and energy categories) decreased to 5.8% YoY in January from 6.2% in December. The market consensus anticipated a print of 6.2%. The monthly data revealed that consumer prices in the United Kingdom decreased by 0.6% in January, compared to -0.4% predictions and 0.4% before.
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The most significant downward contribution to the change in the CPIH and CPI annual inflation rates between December 2022 and January 2023 came from transport (particularly passenger transport and motor fuels) and restaurants and hotels, while the largest partially offsetting upward contribution came from rising prices for alcoholic beverages and tobacco.
Officials at the Bank of England (BoE) have recently emphasized the importance of data for future rate rises. As a result, the Pound might see additional losses in light of the largely negative UK inflation statistics and the mixed employment report from the previous day.
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In addition, a separate survey of economists conducted by Reuters indicated that the BoE will not make policy pivot calls until at least one rate hike of 25 basis points (bps) is implemented in March.
“The EUR/GBP fall could extend and force a break below 0.8800, but we think the bearish story may soon run out of steam, and we favor a rebound to 0.9000 over the course of 2023.” economists at ING believe.
Technically speaking, the EUR/GBP cross remains in an uptrend channel, likely continuing toward the psychological level of 0.90 in the medium term. Therefore, as long as the currency pair trades within that channel, the outlook seems bullish.
EUR/GBP daily chart, source: author´s analysis, tradingview.com