Pound Sterling faces pressure as UK inflation cools in December
- The Pound Sterling sees a negative reaction after a softer-than-expected UK CPI report for December.
- Soft UK inflation data would prompt traders to price in a higher number of BoE interest rate cuts for the year.
- The US Dollar corrects after slower-than-expected US PPI data, awaiting the US CPI report for December.
The Pound Sterling (GBP) wildly reacts in Wednesday’s London session after the release of the United Kingdom (UK) Consumer Price Index (CPI) report for December, which revealed that inflationary pressures grew moderately. The CPI report showed that annual headline inflation surprisingly rose at a slower pace of 2.5% compared to 2.6% in November. Economists expected the inflation data to have accelerated to 2.7%.
On a monthly basis, headline inflation rose by 0.3%, faster than the 0.1% growth in November but slower than estimates of 0.4%.
The core CPI – which excludes volatile items such as food, energy, oil, and tobacco – grew by 3.2% year-over-year, slower than estimates of 3.4% and the former reading of 3.5%.
Services inflation, a closely watched indicator by Bank of England (BoE) officials, decelerated to 4.4% from 5% in November. This sharp slowdown suggests that the BoE would cut interest rates faster this year than in 2024. This scenario would be unfavorable for the near-term outlook of the Pound Sterling.
Meanwhile, the British currency was already underperforming as rising yields on UK gilts have jeopardized Chancellor of the Exchequer Rachel Reeves’ decision not to fund day-to-day spending through foreign borrowings. 30-year UK gilt yields have risen to near 5.47%, the highest level over 26 years. UK yields surged as market participants turned cautious over the UK economic outlook on the back of a likely trade war with the United States (US). President-elect Donald Trump is expected to raise import tariffs heavily, a scenario that will falter the UK’s export sector, being one of the leading trading partners of the US.
Daily digest market movers: Pound Sterling underperforms US Dollar ahead of US inflation data
- The Pound Sterling slightly recovers against the US Dollar (USD) to near 1.2240 in Wednesday’s European session after the release of the UK inflation data. The GBP/USD pair declined as an immediate reaction to the data as softer-than-expected UK CPI data has weighed on the Pound Sterling. However, the US Dollar Index (DXY), which gauges the Greenback’s value against six major currencies, also trades cautiously near the five-day low of 109.05. The Greenback corrected sharply on Tuesday after the US Producer Price Index (PPI) data for December showed a slower-than-expected growth in producer inflation.
- A moderate increase in the US PPI data eased fears that price pressures would remain stubborn, but market expectations that the Federal Reserve (Fed) would cut interest rates more than once this year didn’t accelerate. Market participants expect that the inflation outlook will remain stubborn, as policies such as immigration controls, higher tariffs, and lower taxes under Trump’s administration will boost the economic outlook by fuelling demand for domestically produced goods and services.
- For more cues about the current status of inflation, investors will pay close attention to the US CPI data for December, which will be published at 13:30 GMT. The CPI report is expected to show that month-on-month core inflation rose at a slower pace of 0.2% from November’s reading of 0.3%, with the headline reading rising steadily by 0.3%. On a yearly basis, the core CPI is expected to rise steadily by 3.3%, while the headline figure is expected to accelerate to 2.9% from the former reading of 2.7%.
Technical Analysis: Pound Sterling struggles around 1.2200
The Pound Sterling trades around the key level of 1.2200 against the US Dollar on Wednesday. The outlook for the Cable remains weak as the vertically declining 20-day Exponential Moving Average (EMA) near 1.2405 suggests that the near-term trend is extremely bearish.
The 14-day Relative Strength Index (RSI) rebounds slightly after diving below 30.00 as the momentum oscillator turned oversold. However, the broader scenario remains bearish until it recovers inside the 20.00-40.00 range.
Looking down, the pair is expected to find support near the October 2023 low near 1.2050. On the upside, the 20-day EMA will act as key resistance.
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, also known as ‘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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