- Sterling is under pressure near 1.2700 even though hopes of an early rate cut by the Bank of England have moderated.
- Inflation in the UK remains stubbornly high due to rising fuel costs and seasonal airfare prices.
- Investors await UK retail sales data for more information.
The British Pound (GBP) is torn between the risk-averse state of the markets and the stubbornly elevated UK Consumer Price Index (CPI) data for December. High inflation data from the United Kingdom has pushed back expectations of an early rate cut by the Bank of England (BoE). The pair is expected GBP/USD see further hikes as investors expect the Federal Reserve (Fed) to start cutting interest rates before the BoE.
BoE policymakers are expected to remain vigilant as the UK's economic outlook is vulnerable and price pressures are significantly stubborn. Looking ahead, the British pound will be guided by December retail sales data, due to be released on Friday. Encouraging data on consumer spending would further dampen hopes of an early rate cut by the Bank of England.
Daily market movements: The British pound declines, while the market mood turns pessimistic.
- The British Pound's recovery stalls after rising towards the resistance at 1.2700 level.
- Overall appeal has not been affected as investors do not see that Bank of England policymakers have started talking about interest rate cuts. This comes after consumer price inflation in the UK economy remained stubbornly higher in December.
- British inflation remained surprisingly stable, driven by rising fuel prices, a slight rise in services inflation and an increase in seasonal airfares.
- Annual headline inflation rose strongly, up 4.0% from 3.9% in November, while market participants expected a slowdown to 3.8%.
- In the same period, core inflation, which excludes the volatility of food and oil prices, remained stable at 5.1%. Investors had expected 4.9%.
- Consumer price inflation remains high despite the Bank of England keeping interest rates at high levels. This is expected to deter BoE policymakers from approving short-term interest rate cuts.
- Investors should note that the economic outlook for the British economy is vulnerable and fears of a technical recession are high.
- According to the revised estimate from the UK Office for National Statistics (ONS), the British economy contracted by 0.1% in the third quarter of 2023 and is not expected to record any growth in the last quarter of 2024.
- It would be a challenge for BOE policymakers to decide whether to take a dovish approach to avoid a technical recession or maintain a restrictive monetary policy stance.
- Looking ahead, market participants will focus on UK Retail Sales for December, due to be released on Friday.
- Monthly retail sales are estimated to have contracted 0.5% after rising at a strong 1.3% in November. Annual consumer spending will have increased by 1.1%, compared to a slight increase of 0.1% in November.
- Investors expect annual retail sales, excluding fuel prices, to grow 1.3%, up from 0.3% previously.
- For its part, the Dollar Index (DXY) has rebounded to near 103.60, as investors' risk appetite decreases. The dollar index is expected to continue its bullish trajectory as trade has trimmed bets in favor of a rate cut by the Federal Reserve (Fed) in March.
- Looking ahead, currency action will be guided by Federal Reserve policymakers' guidance on interest rates. Those responsible for the Fed maintain a restrictive stance regarding interest rates, given the lack of investor confidence that inflation will progressively return to the 2% objective in a sustainable manner.
Technical Analysis: Sterling faces pressure around 1.2700
The British Pound has recovered strongly to near 1.2700 after discovering strong buying interest around a new monthly low of 1.2600. The GBP/USD pair rebounded strongly after testing the 50-day EMA, which hovers around 1.2620. However, the Pound is struggling to move the auction above the 20-day EMA, which hovers around 1.2700.
The 14-period Relative Strength Index (RSI) has moved into the 40.00-60.00 range, indicating apathetic behavior.
Pound Sterling FAQ
What is the Pound Sterling?
The British Pound (GBP) is the oldest currency in the world (886 AD) and the official currency of the United Kingdom. It is the fourth most traded currency unit in the world, with 12% of all transactions and an average of $630 billion per day, according to 2022 data.
Its key currency pairs are GBP/USD, also known as “Cable”, which represents 11% of the forex market, GBP/JPY, or the “Dragon” as it is known to traders (3%), and EUR/GBP (2%). The pound sterling is issued by the Bank of England (BoE).
How do Bank of England decisions influence the Pound Sterling?
The most important factor influencing the value of the Pound Sterling is the monetary policy decided by the Bank of England. The Bank of England bases its decisions on achieving its main objective of “price stability”, that is, a stable inflation rate of around 2%. Its main tool to achieve this is the adjustment of interest rates.
When inflation is too high, the Bank of England tries to contain it by raising interest rates, which makes access to credit more expensive for individuals and companies. This tends to be positive for the GBP, as higher interest rates make the UK a more attractive place for global investors to park their money.
When inflation is too low, it is a sign that economic growth is slowing. In this scenario, the BoE will consider lowering interest rates to make credit cheaper, so that companies borrow more to invest in projects that generate growth.
How does economic data influence the value of the Pound?
The published data gauges the health of the economy and may influence the value of the Pound sterling. Indicators such as GDP, manufacturing and services PMIs, and employment can influence the direction of the Pound.
A strong economy is good for the British pound. Not only does it attract more foreign investment, but it may encourage the Bank of England to raise interest rates, which will directly strengthen the Pound. Otherwise, if economic data is weak, the pound is likely to fall.
How does the trade balance affect the Pound?
Another significant data 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 during a given period.
If a country produces highly sought-after exports, its currency will benefit exclusively from the additional demand created by foreign buyers wishing to purchase these goods. Therefore, a positive net trade balance strengthens a currency and vice versa for a negative balance.
Source: Fx Street
I am Joshua Winder, a senior-level journalist and editor at World Stock Market. I specialize in covering news related to the stock market and economic trends. With more than 8 years of experience in this field, I have become an expert in financial reporting.
