The British pound sharply fell in response to news that the UK's inflation rate unexpectedly dropped to its lowest level in the past 18 months. This opens the possibility for the Bank of England to pause or even halt its fastest series of interest rate hikes in the last three decades.
According to the National Statistics Office, the UK's Consumer Price Index in August rose by 6.7% compared to the previous year, down from 6.8% a month earlier. Economists had predicted a rise to 7%. Core prices, which exclude volatile categories, dropped significantly to 6.2% from 6.9%.
Following this, the pound declined as investors adjusted their expectations regarding the Bank of England's tightening policy. Traders now only anticipate one more hike in this cycle, to 5.5%. More importantly, the likelihood of a quarter-point increase tomorrow, which seemed almost certain at the start of this week, has dropped to 60%.
This data is a relief for the UK, which has been grappling with significant inflation issues. While the European Central Bank and the US Federal Reserve have hinted that their tightening cycles may be nearing an end, the Bank of England had to emphasize its commitment to control prices through strict monetary policy. Given that the UK's economy has recently been slowing down, any further rate hikes would be detrimental. This also boosts hopes that Prime Minister Rishi Sunak will achieve his goal of halving inflation this year.
Wage growth rates continue to increase, posing a significant challenge for the central bank. It is unlikely they will abandon all previously announced plans based on a single inflation drop. One decrease in inflation will not significantly influence tomorrow's regulatory decision. As a result, the pound's decline was short-lived, and the bearish pressure on the GBP/USD pair eased. However, if inflation keeps dropping, especially core prices, the chances for a rate hike in November will diminish.
Many economists expect the Bank of England to follow the European Central Bank's path and raise the rate one last time in this cycle. This move will likely be seen as a so-called dovish hike, which will not greatly help the British pound recover its recent losses against the US dollar.
Regarding the technical picture of the GBP/USD, the pound remains under pressure. A rise can only be expected after gaining control over 1.2390. Regaining this range will bring back hope for a recovery towards 1.2420, after which a sharper uptick to around 1.2460 can be anticipated. If the pair falls, bears will attempt to take control of 1.2340. If they succeed, a breakout of this range will affect bulls' positions, pushing GBP/USD down towards a low of 1.2310 with the potential to touch 1.2275.
Meanwhile, bears are continuing to exert pressure on the euro. To regain control, buyers should stay above 1.0660. Doing so could pave the way to 1.0720. From that level, there is potential to reach 1.0750, but achieving this without support from major players will be quite challenging. If the pair declines, significant actions from major buyers could be seen around 1.0660. If no one steps in at that level, it might be wise to wait for a new low of 1.0620 or to consider going long from 1.0580.