What will happen to GBP/USD if the UK surprises with higher CPI?
US released its August CPI report. The headline was 8.3% YoY and expectation of 8.1% YoY and a July reading of 8.5% YoY. Headline inflation is decreasing. However, the Core CPI print for August was 6.3% YoY vs an expectation of 6.1% YoY and a previous reading of 5.9% YoY. After the release of the data, the USD shot higher, pushing GBP/USD lower by nearly 150 pips near 1.1530.
Can a similar situation occur tomorrow for the UK when it releases its own August CPI data ? The headline print is expected to be 10.2% YoY vs a July reading of 10.1% YoY. In addition, the Core CPI is expected to be 6.3% YoY vs a 6.2% YoY reading in July. August’s reading was the highest since February 1982, the BOE has already told us that it expects CPI to reach as high as 13% in October and that the UK economy will enter a recession in Q4. Therefore, unlike that of the US in which Fed is not expecting a recession, higher CPI readings shouldn’t do as much damage to the GBP to the FTSE, as markets are already pricing in an element of higher inflation and lower growth.
The UK releases August CPI tomorrow. Expectations are for a headline print of 10.1% YoY and a core CPI print of 6.4% YoY. If the data is stronger than expected, GBP/USD may move higher but most likely not to the extent that the USD did after the stronger US CPI. The BOE is expected to hike 75bps next week, already warned markets of a potential 13% CPI reading in October and a recession beginning in Q4. Therefore, markets have been pricing in a potential higher inflation reading since the last BOE meeting.