FOCUS ON UK AUGUST CPI

• OVERVIEW OF INFLATION IN THE UK
• A QUICK RECAP ON INFLATION
• HOW INFLATION IS MEASURED IN THE UK
• TECHNICAL ANALYSIS

The Office for National Statistics (ONS) is set to release UK annual inflation rate for the month of August today 18th September 2024 by 7am GMT+4 with forecast at 2.2%. Recall that in July, UK inflation rose to 2.2% as against forecast of 2% as seen in May and June which was in line with the bank’s target as set by the government. Whereas the official bank rate is at 5%, the next policy meeting is tomorrow being the 19th of Sept. The bank is anticipated to maintain its interest rate at 5% following the first cut in August since 2020.

Fig. 1 UK Inflation rate in percentage 

Source: forexfactory.com

A QUICK RECAP ON INFLATION

Inflation serves as a gauge of the rise in prices of goods and services over time, encompassing essentials like food and clothing, as well as services such as haircuts and transportation. Typically, inflation is calculated by contrasting current prices with those from a year prior, with the average price surge being labeled as the inflation rate. Various metrics, including Consumer Price Index, Producer Price Index and the House Price Index are utilized to monitor fluctuations in prices and inflation levels.

HOW INFLATION IS MEASURED IN THE UK

The Office for National Statistics (ONS) compiles monthly data on various items and prices to calculate the Consumer Prices Index (CPI). This 'shopping basket' is updated annually to reflect consumer spending patterns. With a government-mandated 2% inflation target, the goal is to maintain low and stable inflation for effective future planning. High or fluctuating inflation makes pricing difficult for businesses and budgeting challenging for individuals. Conversely, low or negative inflation can discourage spending, leading to economic instability. Striking a balance is crucial to prevent business failures and job losses.

The BOE's Monetary Policy Committee is tasked with adjusting interest rates to maintain a 2% inflation target set by the government. Monthly meetings are held to assess the need for rate changes, with the next meeting scheduled for tomorrow, September 19th, 2024 at 12:00pm GMT +4. Markets has priced in a steady rate at 5%, this is coming in after the bank cut rate in August by 25bp. Despite the recent rate cut, the Bank of England remains cautious as highlighted by Governor Andrew Bailey at the last Jackson Hole symposium. We would likely see this prudence at the upcoming policy meeting. In view of the upcoming data, market participants expect volatility across UK markets which includes but not limited GBP pairs, UK futures and stocks.

TECHNICAL ANALYSIS

GBPJPY has been overall bearish, currently trading below the 50 period EMA and our RSI at neutral level of 54. The pair was initially resisted around 186.73 and 183.72 serving as support. In view of the upcoming data, markets expect some volatility and if we see a softer inflation, technical analysts expect the price to decline with potential target around 183.72 conversely, If we see a higher inflation, then GBPJPY would likely surge with potential target at 186.73
The place of breakout of these levels can’t be ruled out.

Fig.2 GBPJPY H4, Tradingview