UK CPI set to show inflation accelerated in March driven by energy shock

• The United Kingdom’s Office for National Statistics will publish the March CPI data on Wednesday.
• The annual UK headline inflation is set to pick up in March, while growth in core CPI is seen stabilizing.
• The UK CPI data could trigger a big reaction in the Pound Sterling amid receding BoE interest rate hike bets.

The United Kingdom (UK) Office for National Statistics (ONS) will publish the high-impact Consumer Price Index (CPI) data for March at 06:00 GMT. 

The report could significantly alter market expectations about a Bank of England (BoE) interest rate hike later this year, ramping up volatility around the Pound Sterling (GBP), as traders brace for the impact of the energy shock from the Middle East war. 

What to expect from the next UK inflation report?

The UK Consumer Price Index is expected to rise 3.3% year-over-year (YoY) in March, following a 3% increase in February. The reading is likely to come in above the BoE’s projection of 3%, moving further away from its 2% target.

Core CPI inflation, which excludes energy, food, alcohol, and tobacco prices, is expected to hold steady at 3.2% YoY in the reported period.

According to industry experts, official data is expected to show that service inflation remained stable at 4.3% YoY in March.

Meanwhile, the British monthly CPI is seen rising by 0.6% in the same period after a 0.4% growth in February.

“We expect headline inflation to rise to 3.3% year-over-year from 3.0%, driven by the energy supply shock, while core inflation is expected to hold at 3.2%, matching February and in line with consensus expectations. This would mark a significant reversal in the progress toward disinflation seen in the U.K. through February and is likely to persist for several months, “ Wells Fargo said in a research note ahead of the data release. 

How will the UK Consumer Price Index report affect GBP/USD?

It’s the inflation print that covers the first monthly period data after the United States (US) and Israel launched airstrikes on Iran in late February, prompting retaliatory strikes by the Iranian Republic and leading to higher energy costs, particularly for Oil. Therefore, an uptick in headline British inflation, both monthly and annual, is well anticipated.

However, markets may consider this a one-off, as what would matter the most for the BoE when deciding on interest rates are the so-called second-round effects on core inflation from the war impact.

Speaking on the energy shock-led inflationary pressures, in a speech on April 14, BoE policymaker Megan Greene said that “we won’t have definitive evidence of second-round effects for a while, it could take months.”

She further noted that “we can’t just look through negative supply shocks; the view needs to be more nuanced.”

“The swaps curve has slashed BoE rate hike bets over the next twelve months from as much as 100 basis points (bps) on March 26 to 25 bps currently. BoE rate hike bets should ease further given excess slack in the economy. The BoE estimates a negative output gap of -1% of GDP in 2026,” BBH Analysts noted.

The latest labor data published by the Office for National Statistics (ONS) showed annual growth in regular earnings, excluding bonuses, slowed less than expected to 3.6% in the three months to February from 3.8% previously, while the Unemployment Rate unexpectedly fell to 4.9% in the three months to February, from 5.2% in January, and lower than estimates of 5.2%.

With signs of stabilization in the UK labor market and higher inflation projections, the March CPI data will be critical to keeping bets alive for a BoE rate hike this year.

A surprise uptick in the core CPI and services inflation could double down on hawkish BoE expectations. In such a case, the Pound Sterling will receive the much-needed lift, driving GBP/USD back toward the 1.3600 barrier. Conversely, an unexpected slowdown in core readings could push back against BoE rate hike bets, weighing negatively on the pair.

Dhwani Mehta, Asian Session Lead Analyst at FXStreet, offers a brief technical outlook for the major and explains: “GBP/USD is defending the triple top breakout resistance-turned-support near 1.3485, with the 14-day Relative Strength Index (RSI) momentum indicator holding well above the 50 level.”

“The pair needs acceptance above the 1.3600 round level to break the consolidative mode, paving the way toward the 1.3700 threshold. The next topside target is aligned at the February high of 1.3732. On the flip side, the immediate support is seen near 1.3485, below which the 1.3415 area could challenge bullish commitments. That zone is the confluence of the 50-day Simple Moving Average (SMA) and the 200-day SMA. Further down, the 21-day SMA at 1.3384 will be the level to beat for sellers,” Dhwani adds.