Pound Sterling plummets as soft UK CPI data bolsters rate cut bets – Crypto News – Crypto News
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Pound Sterling plummets as soft UK CPI data bolsters rate cut bets – Crypto News

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  • Pound Sterling drops sharply as UK inflation softened sharply in November.
  • UK’s monthly headline inflation surprisingly contracted by 0.2%.
  • Investors may raise bets in favour of early rate cuts by the BoE.

The Pound Sterling (GBP) fell sharply after the United Kingdom’s Office for National Statistics (ONS) reported a significant decline in inflation in November. The ONS reported that lower fuel prices were major contributor to a sharp decline in price pressures.

The GBP/USD pair has been heavily dumped as a more-than-anticipated decline in the UK Consumer Price Index (CPI) increase bets for early interest-rate cuts by the Bank of England (BoE). After the release of the UK inflation data, Chancellor Jeremy Hunt commented that inflationary pressures have been removed from the economy. Meanwhile, UK Prime Minister Rishi Sunak is set to meet his promise of halving inflation to 4.3% by the year-end.

While UK inflation has declined more than expected in November, BoE policymakers are expected to hold a stance for keeping interest rates higher for longer. Price pressures in the UK are still the highest in comparison with other developed economies, which would force BoE policymakers to call for rate cuts later than other major central bankers.

Daily Digest Market Movers: Pound Sterling weakens after soft UK inflation data

  • Pound Sterling faces an intense sell-off as the ONS has released a softer-than-anticipated inflation report for November.
  • Monthly headline inflation contracted by 0.2% in November, against expectations of 0.1% increase. Annual headline inflation grew at a slower pace of 3.9% against expectations of 4.4%. Headline inflation has grown by 4.6% in October.
  • The annual core inflation, which excludes volatile food and energy prices, softened to 5.1% versus the consensus of 5.6% and the former reading of 5.7%.
  • Monthly Producer Price Index (PPI) for input and output have contracted 0.3% and 0.1%, respectively, less than what markets expected.
  • This indicates prices of goods at factory gates fell, likely due to a decline in domestic and external demand.
  • Despite the soft inflation report, the Bank of England is expected to keep interest rates restrictive for a more extended period.
  • BoE Deputy Governor Sarah Breeden emphasized keeping the policy restrictive to keep price pressures in check.
  • While asked about guidance on interest rates, Breeden said “I have no pre-determined policy path in mind.”
  • On Monday, BoE Deputy Governor Ben Broadbent also stressed keeping interest rates higher for a longer period. Broadbent highlighted the need for more evidence to confirm that inflation is in a clear downtrend.
  • Later this week, investors will focus on November’s UK Retail Sales data. According to the estimates, this measure of consumer spending grew by 0.4% on a monthly basis, against a 0.3% decline in October.
  • Meanwhile, the US Dollar Index (DXY) turns sideways near 102.00 after a slight decline on increasing rate cut expectations by the Federal Reserve (Fed).
  • The DXY US Dollar Index failed to find a firm footing despite Atlanta Federal Reserve President Raphael Bostic criticizing any urgency of interest rate cuts. Bostic added that the central bank must ensure that inflation returns to 2% given that the economy is resilient.
  • This week, investors will focus on the US core Personal Consumption Expenditure price index (PCE) data, which will be published on Friday.
  • Per the preliminary consensus, monthly core PCE is expected to grow at a steady pace of 0.2%. The annual core PCE is seen softening to 3.3% against the former reading of 3.5%.

Technical Analysis: Pound Sterling drops below 1.2650

Pound Sterling surrenders its entire gains generated on Tuesday after the release of the softer-than-projected UK inflation data for November. The GBP/USD pair trades inside Tuesday’s range but is expected to extend its correction towards the 20-period Exponential Moving Average (EMA), around 1.2600.

The Relative Strength Index (RSI) (14) trades inside the 40.00-60.00 range, which suggests a consolidation ahead.

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.

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