UK inflation jumps to 3%, pound eyes FOMC minutes

The British pound continues to have an uneventful week.  In the European session, GBP/USD is trading at 1.2595, down 0.13% on the day.

UK inflation hits 3% in January

Consumer inflation in the UK rose to 3% y/y in January, a sharp rise from the 2.5% gain in December and higher than the market estimate of 2.8%.  This was the highest level since March 2024 and was driven by price increases in transportation, fuel and food.  Monthly, CPI decreased by 0.1%, following a 0.4% gain in December and above the market estimate of -0.3%.

It was a similar story for core CPI, which rose to 3.7% y/y from 3.2% in December, in line with expectations and its fastest pace since April 2024.  Monthly, core CPI decreased 0.4%, down from a 0.3% gain in December but above the market estimate of -0.3%.  Services inflation, which has been stubbornly high and  is carefully monitored by the Bank of England, rose to 5% from 4.4% but was below the Bank of England’s forecast of 5.2%.

The jump in headline and core inflation along with strong wage growth data earlier in this week will be a major headache for the BoE.  Inflation is likely to accelerate, with an increase in employer taxes kicking in on April 1.  The BoE meets next on March 20 and is unlikely to deliver a second straight rate cut.  Governor Andrew Bailey said last week that the UK economy remains “quite static” and the BoE wants to continue lowering rates in order to boost the flagging economy, but containing inflation remains the central bank’s number one priority.

The Federal Reserve releases the minutes of the Jan. 29 later today.  At the meeting, the Fed maintained the benchmark rate and members reiterated that the Fed would remain patient in its rate path and make decisions based on the data.

GBP/USD Technical

• GBP/USD has pushed below support at 1.2609 and is testing support at 1.2587.  Below, there is support at 1.2559
• 1.2637 and 1.2659 are the next resistance lines

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