- Pound Sterling falls sharply after the big drop in UK inflation data.
- A steady US Dollar and increasing bets over upcoming BoE rate cut weigh on the Pound Sterling.
- This week, the US core PCE price index and UK Retail Sales data will be keenly watched.
The Pound Sterling (GBP) struggles for a firm footing as a sharp drop in the United Kingdom Consumer Price Index (CPI) for November has deepened expectations of early rate cuts by the Bank of England (BoE). The GBP/USD pair is exposed to more downside as the Pound Sterling has lost its competitive advantage of a longer restrictive policy stance after a sharp decline in inflation.
BoE policymakers may continue favouring a restrictive policy stance until price stability is ensured, but market participants are expected to keep rate cut expectations alive. The next economic trigger for the Pound Sterling will be the Retail Sales data for November, which is scheduled for Friday. Higher-than-projected growth in consumer spending may bring some relief for the Pound Sterling.
Daily Digest Market Movers: Pound Sterling faces pressure ahead of Retail Sales data
- Pound Sterling falls after a bigger-than-anticipated drop in UK inflation.
- Annual headline inflation fell sharply below 4.0% amid a significant decline in fuel prices.
- Annual core CPI that excludes volatile food and Oil prices softened to 5.1% against expectations of 5.6%.
- After a sharp decline in UK inflation, Finance Minister Jeremy Hunt said the data showed inflation pressures were being removed from the economy, Reuters reported.
- A bigger drop in price pressures in November has bolstered bets in favour of early rate cuts by the BoE in 2024.
- Investors see a 50% chance for first rate cut by the BoE in March. On the contrary, investment banking firm Goldman Sachs advanced its projection for the first rate cut to May from June after inflation fell to two-year low.
- While significant improvement in inflation towards 2% has escalated bets in favour of early rate cuts, policymakers are expected to remain lean towards a restrictive monetary policy stance.
- This week, BoE policymakers Sarah Breeden and Ben Broadbent emphasized keeping interest rates higher for longer to keep price pressures in check.
- The major reason behind favouring a restrictive monetary policy stance for longer is to gain confidence that inflation is clearly in a downtrend as price pressures in the UK region are highest than peers in Group of Seven economies.
- Going forward, investors will focus on the Retail Sales data for November, which will be published on Friday at 07:00 GMT.
- As per the preliminary estimates, monthly Retail Sales are expected to grow by 0.4% against a contraction of 0.3% in October. Annually, retail spending contracted at a slower pace of 1.3% against a former decline of 2.7%.
- The US Dollar Index (DXY) consolidates in a tight range as the upside is capped due to deepening rate cut expectations by the Federal Reserve (Fed). The downside seems limited temporarily as investors await the release of the core Personal Consumption Expenditure Price Index (PCE) for November, scheduled for Friday.
Technical Analysis: Pound Sterling sees more downside to near 1.2500
Pound Sterling struggles for a firm footing after an intense sell-off to near a weekly low of around 1.2640. The GBP/USD pair is expected to see more downside as a further breakdown would expose it towards the psychological support of 1.2500.
On a daily timeframe, the trend is still bullish as 20-day and 50-day Exponential Moving Averages (EMAs) are advancing. Momentum oscillator, Relative Strength Index (RSI) (14), is indicating further consolidation ahead.
What is the Pound Sterling?
The Pound Sterling (GBP) is the oldest currency in the world (886 AD) and the official currency of the United Kingdom. It is the fourth most traded unit for foreign exchange (FX) in the world, accounting for 12% of all transactions, averaging $630 billion a day, according to 2022 data.
Its key trading pairs are GBP/USD, aka ‘Cable’, which accounts for 11% of FX, GBP/JPY, or the ‘Dragon’ as it is known by traders (3%), and EUR/GBP (2%). The Pound Sterling is issued by the Bank of England (BoE).
How do the decisions of the Bank of England impact on the Pound Sterling?
The single most important factor influencing the value of the Pound Sterling is monetary policy decided by the Bank of England. The BoE bases its decisions on whether it has achieved its primary goal of “price stability” – a steady inflation rate of around 2%. Its primary tool for achieving this is the adjustment of interest rates.
When inflation is too high, the BoE will try to rein it in by raising interest rates, making it more expensive for people and businesses to access credit. This is generally positive for GBP, as higher interest rates make the UK a more attractive place for global investors to park their money.
When inflation falls too low it is a sign economic growth is slowing. In this scenario, the BoE will consider lowering interest rates to cheapen credit so businesses will borrow more to invest in growth-generating projects.
How does economic data influence the value of the Pound?
Data releases gauge the health of the economy and can impact the value of the Pound Sterling. Indicators such as GDP, Manufacturing and Services PMIs, and employment can all influence the direction of the GBP.
A strong economy is good for Sterling. Not only does it attract more foreign investment but it may encourage the BoE to put up interest rates, which will directly strengthen GBP. Otherwise, if economic data is weak, the Pound Sterling is likely to fall.
How does the Trade Balance impact the Pound?
Another significant data release for the Pound Sterling is the Trade Balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports over a given period.
If a country produces highly sought-after exports, its currency will benefit purely from the extra demand created from foreign buyers seeking to purchase these goods. Therefore, a positive net Trade Balance strengthens a currency and vice versa for a negative balance.
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