Pound Sterling falls sharply on below-forecast UK inflation

The Pound Sterling (GBP) faced a sell-off after reaching a two-month high as price pressures in the UK economy softened significantly in October. Annual headline Consumer Price Index (CPI) grew at a slower pace of 4.6%, adding to signs that UK Prime Minister Rishi Sunak will be able to fulfill his promise of halving inflation by the year-end. Meanwhile, the UK Producer Price Index (PPI) fell, suggesting that goods producers were forced to cut prices at factory gates due to a poor demand outlook.

The commentary came from UK Chancellor Jeremy Hunt after the release of the inflation data in which he acknowledged the beginning of victory against inflation. He added that we can look to the next stage of the plan for long-term growth.

Some recovery in the US Dollar after the release of the US Retail Sales has weighed pressure on the GBP/USD pair. The Cable has surrendered decent gains, which were gained by a soft US inflation report. The broader appeal for risk-perceived assets improved after easing consumer inflation in the US economy, which elevated hopes of no more interest rate increases from the Federal Reserve (Fed).

Daily Digest Market Movers: Pound Sterling drops as US Dollar attempts recovery

• Pound Sterling faces some selling pressure as the UK Office for National Statistics (ONS) has reported that inflation has eased significantly in October.
• The appeal for the Pound Sterling is upbeat as the market sentiment is bullish amid easing price pressures in the US economy.
• Monthly headline inflation in the UK economy remained stagnant in October while investors anticipated a nominal growth of 0.1%. In September, headline inflation grew strongly by 0.5%. The annual headline CPI rose by 4.6%, slower than the consensus of 4.8% and the former reading of 6.7%.
• This indicates that the promise made by UK Prime Minister Rishi Sunak to halve inflation to 5.4% by the year-end has been fulfilled. Sunak promised to halve inflation in January when price growth was near 10.7%.
• The core CPI that excludes volatile food and Oil prices has softened to 5.7% against expectations of 5.8% and the prior reading of 6.1%.
• It is worth noting that the annual Producer Price Index (PPI) deflated in October, which indicates that firms have reduced prices of goods and services offered at factory gates due to poor demand from domestic and overseas markets.
• The monthly Retail Price Index surprisingly contracted by 0.2%.
• A record decline in price pressures in October conveys that the Bank of England (BoE) may not need to raise interest rates further.
• On Tuesday, BoE Chief Economist Huw Pill cited that further policy tightening is not needed to tame inflationary pressures but the BoE is prepared if needed. He further added that the BoE must focus on inflation, not tackling other issues in the UK economy.
• BoE policymakers could discuss cutting rates earlier as the UK labor market is facing the wrath of higher interest rates.
• On Tuesday, the UK laborforce shed workers for the third time in a row as firms have witnessed a sharp decline in new business. The Unemployment Rate remained unchanged at 4.2%.
• UK employers are pessimistic about the near-term environment as they expect the BoE to keep interest rates higher at least until mid-2024.
• Meanwhile, The US Dollar Index (DXY) finds some support near 104.00 after a nominal decline in the US Retail Sales data. Monthly Retail Sales contracted by 0.1% in October while investors projected a decline by a higher pace of 0.3%. In the previous month, the economic data grew by 0.7%.
• The US Producer Price Index (PPI) report for October remained softer than expectations. Monthly headline PPI deflated by 0.5% against estimates of 0.1% expansion due to lower gasoline prices. In the same period, the core PPI remained stagnant.
• Investors expect that the rate-tightening campaign by the Federal Reserve (Fed) has concluded due to easing prices pressures.
• While US inflation softened in October, Richmond Fed Bank President Thomas Barkin said that the central bank is making real progress on inflation but is not convinced inflation is on a smooth glide path to 2%. Barkin warned that the Fed needs to do more to curb demand and inflation.

Technical Analysis: Pound Sterling drops to near 1.2430

Pound Sterling faces nominal pressure from a two-month high near the crucial resistance of 1.2500. The broader appeal remains upbeat due to improved market sentiment. The GBP/USD pair rallies after testing the breakout region of the symmetrical triangle formed on a daily time frame. The Cable has climbed above the 200-day Exponential Moving Average (EMA), which indicates that the near-term demand has turned upbeat.