Investors abandoned the US dollar, which allowed the GBP/USD exchange rate to continue its upward rebound. The gains reached the 1.2446 resistance level, the highest for the currency pair in six months. This was to calm down the tone of stress, which was enough to push the US dollar to historical record levels. The sterling dollar pair stabilizes around the level of 1.2385 at the time of writing the analysis, at a time when the sterling pairs await the monetary policy decisions of the Bank of England.
Prior to that, UK CPI inflation came in below analyst estimates when it was released in the middle of the week, a development that could prove supportive of the pound, analysts say. The pound was therefore supported near recent highs after the UK's core CPI rose 10.7% y/y in November according to the Office for National Statistics, a result that was lower than the 10.9% expected by markets and the 11.1% in October. Inflation rose 0.4% for the month, which was below the 0.6% consensus it was looking for and a sharp drop from October's 2.0% increase.
According to official figures, the core consumer price index - which gives a better indicator of real domestic inflationary pressure because it excludes fuel and food - rose 0.3% during the month, below expectations for a 0.5% rise and an increase of 0.7% in October. This brings the annual rate of core CPI to 6.3%, down from expectations (6.5%) and the previous month (6.5%). Commenting on the numbers, Samuel Toombs, chief UK economist at Pantheon Macroeconomics, says: “Finally! A clear slowdown in the rate of rise in core prices.” And “A decline in CPI inflation in November will comfort the Monetary Policy Committee, after the October reading beat its forecast by 0.2 percentage points and suggests that the peak rate is now firmly entrenched in the past.”
The weaker-than-expected readings could convince the Bank of England that it can slow down the pace of interest rate hikes. This in turn usually leads to lower UK bond yields and acts as a drag on the UK currency as the relative attractiveness of UK bonds in the international market decreases. While the textbook says that low inflation should lead to a weaker currency, this may not hold in the current stagflation environment: the British economy is poised for a period of downturn due to rising prices and this weak growth environment is fundamentally unsupportive of the pound.
Easing inflation may be supportive of the economic outlook and the GBP.
Inflation remains high and recent data confirms that the labor market remains tight, ensuring that wage pressures will continue to rise. Thus, the Bank of England will welcome the data, but will probably say on Thursday that more rate hikes are needed.
GBP/USD forecast today:
- Despite the halting of the recent rebound gains of the GBP/USD pair, the general trend of the currency pair is still bullish.
- The stability is above the resistance 1.2400, and moving the technical indicators towards overbought levels.
- We prefer to think about selling the currency pair from the resistance levels 1.2475, 1.2530, and 1.2600, respectively.
On the other hand, and for the same period of time, a break of the current trend will occur if the currency pair moves towards the support levels 1.2170 and the psychological support 1.2000, respectively.
Today, the GBP/USD will be affected by the monetary policy decisions of the Bank of England and the rest of the important US data results, led by retail sales.
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