UK inflation lower than expected, Sterling shrugs

The British pound is showing limited movement on Wednesday. In the European session, GBP/USD is currently trading at 1.2224, up 0.11%.

The UK's annual inflation rate eased slightly in December 2024, dropping to 2.5% from 2.6% in November. This was also lower than the market estimate of 2.6%, although it matched the BoE inflation forecast from November. Monthly, CPI rose 0.3% in December from 0.1% a month earlier. Core CPI fell to 3.2% y/y from 3.5% in November but the monthly rate climbed to 0.3%, up from 0% in November.

The key drivers in the drop in headline CPI were lower prices for hotels and restaurants. As well, services inflation, which is monitored carefully by the Bank of England, dropped to 4.4% in December from 5% in November. This was the lowest level since March 2022.

The inflation report was warmly received by the money markets, which increased their expectations of a BoE rate cut next in February. Currently, the money markets have priced in an 82% probability of a quarter-point hike next month and two cuts have been almost fully priced for 2025. It is also good news for the government, as borrowing costs, which have been on the rise, eased slightly following the inflation release. The increase in borrowing costs have raised the possibility that the government would fall short of its budget rules and would have to make further spending cuts.

All eyes on are on the December US CPI report, which will be released later today. Headline CPI is expected to rise 2.9% y/y, up from 2.7% in November. Monthly, headline CPI is projected to remain unchanged at 0.3%. Core CPI, which is a better gauge of inflation trends, is expected to remain unchanged at 3.3% y/y and dip to 0.2% m/m from 0.3% in November. An unexpected inflation reading could have a significant impact on the direction of the US dollar.

• GBP/USD is putting pressure on support at 1.2202. Below, there is support at 1.2154
• 1.2264 and 1.2312 are the next resistance lines