- Pound Sterling drops sharply as UK headline inflation deflates significantly in January.
- Soft UK CPI data has propelled BoE’s rate-cut bets.
- Stubborn US inflation data has pushed back Fed rate-cut hopes.
The Pound Sterling (GBP) faces an intense sell-off in Wednesday’s early European session as the United Kingdom Office for National Statistics (ONS) has reported softer-than-anticipated inflation data for January. Annual headline and core Consumer Price Index (CPI) rose steadily by 4.0% and 5.1%, respectively, while the monthly headline figure deflated significantly by 0.6%.
Surprisingly soft inflation report and a moderate growth in Average Earnings are expected to allow Bank of England (BoE) policymakers to consider early rate cuts than market participants had anticipated earlier.
Last week, BoE Deputy Governor Sarah Breeden said rate cuts will be based on how inflation and wage growth will evolve. The Pound Sterling tends to face foreign flows if expectations for BoE’s dovish bets escalate.
The GBP/USD pair is expected to remain in the negative trajectory due to softening consumer price inflation and dismal market sentiment. The broader appeal for safe-haven assets improves as sticky United States inflation data push back expectations for a rate-cut decision by the Federal Reserve (Fed) in the May monetary policy meeting. Fed policymakers lack evidence to build confidence over inflation declining sustainably towards the 2% target. This has boosted the US Dollar as a hawkish narrative by the Fed tends to attract more foreign inflows.
Daily Digest Market Movers: Pound Sterling falls sharply while US Dollar refreshes three-month high
- Pound Sterling resumes its downside journey as the United Kingdom ONS has reported a soft inflation report for January.
- The annual headline and core inflation grew steadily at 4.0% and 5.1%, respectively. However, investors anticipated that the headline and core CPI had accelerated to 4.2% and 5.1%, respectively.
- The monthly headline inflation deflated at a robust pace of 0.6% against the consensus of 0.3%. In December, the economic data was expanded by 0.4%.
- A sharp decline in monthly inflation data is expected to prompt expectations of early rate cuts by the Bank of England.
- A soft inflation report has neutralized decent labor demand and moderate growth in Average Earnings data for three months ending December, released on Tuesday.
- The Unemployment Rate fell sharply to 3.8% from the consensus of 4.0% and the former release of 4.2%.
- Annual Earnings including bonuses grew by the smallest pace of 5.8% since three months ending July 2022, while investors projected a slower wage growth of 5.6%.
- On Tuesday, the GBP/USD pair witnessed an intense sell-off after the United States Bureau of Labor Statistics (BLS) released a stubborn inflation report for January.
- The US core inflation that strips off volatile food and oil prices rose steadily by 3.9%, while investors anticipated a decline to 3.7%.
- Persistent price pressures cooled down expectations of Federal Reserve rate cuts in May.
- The US Dollar Index (DXY) advances to 105.00 amid dismal market mood.
Technical Analysis: Pound Sterling declines towards 1.2500
Pound Sterling falls back vertically after failing to sustain above the round-level resistance of 1.2600. The near-term outlook of the GBP/USD pair has turned bearish as it has dropped below the 20, 50 and 100-day Exponential Moving Averages (EMAs). The Cable is declining towards the 200-day EMA, which trades around 1.2510.
The 14-period Relative Strength Index (RSI) has dropped to 40.00. A slippage below the same would trigger a bearish momentum.
BoE FAQs
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).
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.
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.
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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