**GBP/USD Forecast: Pound Remains Soft as UK CPI Shrugged Off Ahead of Budget**
*Original article credit: Fiona Cincotta, Forex.com*
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**Overview**
The British pound (GBP) traded on the defensive against the US dollar (USD) following the release of UK inflation numbers, showing only minimal upside after digesting the latest Consumer Price Index (CPI) report. Market participants largely shrugged off the data, focusing attention instead on the upcoming UK Spring Budget and pressing questions over the Bank of England’s monetary policy direction.
Below, we break down the context, review key data, and analyze GBP/USD prospects as the pair trades in a subdued manner amid uncertainty over UK economic growth, inflation trajectory, and the evolving interest rate outlook.
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**UK CPI Disappoints for Second Month**
The latest CPI numbers, released by the Office for National Statistics, offered little comfort for those hoping for inflationary pressures to delay Bank of England easing. While the headline CPI reading came in at 4.0 percent year-on-year in January, unchanged from December, expectations had been for a mild fall to 3.8 percent. The core annual CPI figure remained steady as well, at 5.1 percent.
Key highlights:
– **Headline CPI (YoY):** 4.0% (vs. 3.8% expected, 4.0% prior)
– **Core CPI (YoY):** 5.1% (vs. 5.1% prior)
– **CPI (MoM):** -0.6% (vs. -0.3% expected)
The monthly decline reflected traditional seasonal patterns, particularly falls in transport and recreation, but food inflation and core services inflation remained uncomfortably persistent.
**Market Reaction and Implications**
Traders sold GBP/USD in the immediate aftermath of the report, as it gave little reason for markets to reverse their current pricing that expects the Bank of England to begin loosening policy in late 2024. While core inflation remains sticky, the trend is decelerating, enough to keep rate cut bets alive.
– The market focus has shifted away from inflation to growth concerns.
– The March Monetary Policy Committee (MPC) meeting becomes critical, with inflation expected to cool and BoE needing to assess the risk of overtightening against a slowing economy.
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**UK Economic Context: Demand Weakness and Growth Worries**
Underlying weakness in UK economic data has added to the recent softness in the pound.
Recent figures show:
– **GDP contracted in Q4 2023,** with a quarterly drop of 0.3%.
– The UK officially entered a technical recession after two consecutive negative quarters for growth.
– Real wage growth remains subdued, consumer confidence is fragile, and business investment is lagging amid Brexit-related uncertainties and global headwinds.
This backdrop makes it more difficult for the Bank of England to justify holding rates higher for longer, even as headline inflation remains above the central bank’s 2% target.
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**Bank of England Path: Cautious Optimism but Easing on the Horizon**
The question the market is grappling with is not “if” interest rates will fall, but “when.”
Bank of England Governor Andrew Bailey has repeatedly emphasized the need for patience, highlighting signs that inflation is headed downwards, but has stopped short of clearly signaling the timing of cuts.
Key factors influencing the BoE decision-making:
– **Services Inflation and Wage Growth:** While both remain strong, they continue to moderate more slowly than headline CPI, giving the BoE justification to avoid hasty cuts.
– **Growth Risks:** With the UK economy stagnating, pressure is mounting for the central bank to provide support, especially if economic malaise continues into the second quarter of 2024.
– **Fed Rate Path:** The US Federal Reserve’s own delay in rate cuts complicates the BoE’s dilemma, as large interest rate differentials could
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