Pound Sterling recovers further on soft US Dollar, ignores soft UK CPI data

Pound Sterling gauges cushion as investors ignore deepening BoE rate cut expectations.
A steady US Dollar and increasing bets over upcoming BoE rate cut may 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) discovers an interim support near 1.2640 despite 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 expected to remain volatile 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 recovers as US Dollar tumbles

Pound Sterling attempts recovery as investors have started ignoring 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) delivers a breakdown of the consolidation as soft Q3 Gross Domestic Product (GDP) data joins deepening rate cut expectations by the Federal Reserve (Fed).
The United States Bureau of Economic Analysis (BEA) reported in its final report that the economy grew at a slower pace of 4.9% against expectations of 5.2%.
Meanwhile, investors await the core Personal Consumption Expenditure Price Index (PCE) for November, scheduled for Friday.

Technical Analysis: Pound Sterling advances toward 1.2700

Pound Sterling manages to get a firm footing after an intense sell-off to near a weekly low of around 1.2640. The GBP/USD pair is still at make or a break and a 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.

BoE FAQs

What does the Bank of England do and how does it impact the Pound?

The Bank of England (BoE) decides monetary policy for the United Kingdom. Its primary goal is to achieve ‘price stability’, or a steady inflation rate of 2%. Its tool for achieving this is via the adjustment of base lending rates. The BoE sets the rate at which it lends to commercial banks and banks lend to each other, determining the level of interest rates in the economy overall. This also impacts the value of the Pound Sterling (GBP).

How does the Bank of England’s monetary policy influence Sterling?

When inflation is above the Bank of England’s target it responds by raising interest rates, making it more expensive for people and businesses to access credit. This is positive for the Pound Sterling because higher interest rates make the UK a more attractive place for global investors to park their money. When inflation falls below target, it is a sign economic growth is slowing, and the BoE will consider lowering interest rates to cheapen credit in the hope businesses will borrow to invest in growth-generating projects – a negative for the Pound Sterling.

What is Quantitative Easing (QE) and how does it affect the Pound?

In extreme situations, the Bank of England can enact a policy called Quantitative Easing (QE). QE is the process by which the BoE substantially increases the flow of credit in a stuck financial system. QE is a last resort policy when lowering interest rates will not achieve the necessary result. The process of QE involves the BoE printing money to buy assets – usually government or AAA-rated corporate bonds – from banks and other financial institutions. QE usually results in a weaker Pound Sterling.

What is Quantitative tightening (QT) and how does it affect the Pound Sterling?

Quantitative tightening (QT) is the reverse of QE, enacted when the economy is strengthening and inflation starts rising. Whilst in QE the Bank of England (BoE) purchases government and corporate bonds from financial institutions to encourage them to lend; in QT, the BoE stops buying more bonds, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive for the Pound Sterling.

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