- 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 shifts on backfoot after soft 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 to near 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.
Inflation FAQs
Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.
The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.
Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.
Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it.
Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.
Source: https://www.fxstreet.com/news/pound-sterling-tumbles-on-soft-uk-inflation-data-202312200730