- Pound Sterling remains offered as investors turn cautious ahead of UK inflation data.
- The UK inflation is seen falling further due to BoE’s tight interest rate policy.
- BoE Broadbent turns spotlight on wage growth related inflation.
The Pound Sterling (GBP) faces a sell-off amid uncertainty over the United Kingdom Consumer Price Index (CPI) for November, scheduled for release on December 20.
The GBP/USD pair struggles for a recovery as softer inflation data could prompt Bank of England (BoE) policymakers to exit from “sufficiently restrictive” monetary policy stance and escalate hopes for more rate cuts in 2024. Whilst good for consumers and homeowners this would be negative for the Pound, as lower interest rates tend to reduce foreign capital inflows.
Investors see the UK’s headline and core inflation declining further in November as higher interest rates have dampened household spending on core goods. Prices of goods at factory gates are seen contracting due to poor demand from the slowing domestic and international economy.
Daily Digest Market Movers: Pound Sterling remains offered while US Dollar consolidates
- Pound Sterling corrects to near 1.2650 as investors await the UK’s inflation data for November, which will be published on Wednesday at 07:00 GMT.
- The UK inflation data is expected to continue easing further amid higher interest rates by the Bank of England, which has dampened the overall consumer spending and sluggish economic activities.
- According to the preliminary consensus, monthly headline inflation is expected to have grown by 0.2% against a stagnant performance in October. The annual headline CPI is seen declining to 4.4% against the former reading of 4.6%.
- UK’s core inflation that strips off volatile food and Oil prices is estimated to have dropped to 5.5% versus. 5.7% in October.
- In the event if the data shows a continuation of easing inflation it would be a sign of relief for BoE policymakers, which have been favouring a tightening regime for interest rates to achieve price stability.
- Meanwhile, monthly Producer Price Index (PPI) for input and final products are seen contracting by 0.6% and 0.1% respectively. This indicates that producers were forced to reduce prices of goods at their factory gates due to a sharp decline in consumers’ demand.
- Investors have already started raising bets for four or five rate cuts in 2024 amid easing inflationary pressures. However, BoE Deputy Governor Ben Broadbent said that more evidence is needed to conclude that the price index is in a clear downtrend.
- Ben Broadbent, on Monday, highlighted disparities in labour market measures, as the Office for National Statistics (ONS) shifted to an experimental series method to calculate employment data due to lower responses.
- Broadbent warned that sticky wage growth could force the BoE to keep interest rates elevated for a longer period.
- Last week, the BoE emphasized keeping interest rates in a restrictive territory to ensure the achievement of price stability after keeping interest rates unchanged at 5.25%.
- Meanwhile, the US Dollar Index (DXY) continues to trade in a lackluster way, trapped in a narrow range around 102.50 after recovering from the crucial support of 101.80.
- The USD Index rebounded after New York Federal Reserve (Fed) Bank President John Williams said it is premature to speculate rate cuts as the central bank is not talking about them right now.
- The broader appeal for the USD Index remains weak as the Fed is numero uno among western central bankers, when it comes to discussing cutting rates in 2024.
- Last week, median projections from Fed policymakers showed that interest rates would be reduced by 75 basis points (bps) in 2024, with core Personal Consumption Expenditure price index (PCE) falling to 2.4%.
- On Monday, San Francisco Fed Bank President Mary Daly said that it would be appropriate to lower borrowing costs in 2024 amid progress in inflation declining towards 2% this year.
Technical Analysis: Pound Sterling corrects to near 1.2630
Pound Sterling finds an interim support near 1.2630 after a steep correction from almost four-month high of 1.2800. The broader trend of the GBP/USD pair is bullish as it is forming a Cup and Handle chart pattern. A decisive break above the handle and round-level resistance of 1.2800 could open room for upside towards the psychological resistance of 1.3000. The 20-day Exponential Moving Average (EMA) around 1.2600 will likely continue to provide support to the Pound Sterling bulls.
Pound Sterling FAQs
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).
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.
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.
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.