The UK inflation data misses consensus estimates, causing market participants to have increased doubts about interest rate prospects and the pound sterling.

The Pound Sterling weakened against the US Dollar and Euro in Wednesday's (September 20th) trading. The release of UK inflation data significantly missed consensus estimates, leading market participants to have increased doubts about the prospects of the next interest rate hike. GBP/USD is locked in the lowest range since early June at 1.2390 when writing this news.

GBP/USD

Global inflation rates have recently rebounded beyond expectations, driven by the rise in oil prices. Inflation in the United States, Canada, and China surged in August 2023. However, inflation in the UK has further weakened.

The UK Consumer Price Index (CPI) for all commodity groups grew by 0.3% in August 2023, less than half of the consensus estimate set at 0.7%. The Annual CPI then corrected further from 6.8% to 6.7% instead of rising to 7.0% as anticipated by the consensus.

The UK Consumer Price Index (CPI) for core goods grew only by 0.1% in August, marking a significant slowdown compared to the 0.3% increase in July. As a result, the Annual Core CPI rate dropped from 6.9% to 6.2%.

Analysts believe this data will increase the dovish tone in tomorrow's Bank of England's (BoE) meeting announcement. As a result, the Pound Sterling is under pressure in various currency pairs.

"The drop in the headline rate of CPI inflation in August probably won't stop the MPC from pressing ahead and raising the Bank Rate to 5.50%, from 5.25%, this week, but it will support the case for more neutral language regarding further tightening in the minutes and a pause in November," says Samuel Tombs, Chief UK Economist at Pantheon Macroeconomics.

"Today's inflation news has prompted a further initial fall in sterling as markets anticipate a potentially more dovish update tomorrow on interest rates from the Bank of England," says Rhys Herbert, an economist at Lloyds Bank.

Leading up to a series of important events this week, GBP/USD fluctuates within a narrow range. Market participants are awaiting the Federal Reserve's interest rate announcement in the next few hours, followed by the Bank of England's announcement during the European session on Thursday.

The Fed's stance typically has a stronger impact than the announcements of other central banks in the forex market. However, the Bank of England's stance is also important for Sterling traders.