- The pound sterling performed weaklier against other major currencies after inflation figures for the UK in October came in below analyst expectations.
- This confirms market expectations that the Bank of England will be able to cut interest rates by the middle of 2024.
- Recently, the gains for the pound sterling against the US dollar pair GBP/USD reached the resistance level of 1.2505, the highest level in two months, but retreated to the support level of 1.2403 after lower-than-expected UK inflation figures and is stabilizing around the 1.2413 level at the start of the Thursday session.
Otherwise, the Office for National Statistics said the main inflation rate for the Consumer Price Index in the UK fell from 6.7% year-on-year in September to 4.6% in October, which is below the consensus forecast of 4.8%. also, Inflation also remained flat at 0% monthly in October, which was a sharp drop from 0.5% in September and slightly below the forecast of 0.1%.
According to analysts, "The pound sterling weakened after the release of weaker-than-expected UK inflation data, as markets now expect Bank of England interest rates to remain unchanged at the next few policy meetings, with the first UK interest rate cut being set for around the middle of 2024."
The decline in household energy bills in October and the mechanical withdrawal of last October's huge energy surge from the annual figure led to a significant decline in headline inflation, meaning that the large decline was well anticipated by investors. However, from a monetary policy perspective, a decline in core CPI inflation to 5.7% y/y in October (consensus: 5.8%) from 6.1% would be welcomed by the Bank of England. Moreover, according to the advertiser, the core CPI rose by only 0.3% during the month, which was lower than expectations of 0.4% and 0.5% in September. Also, CPI inflation in the services sector - one of the bank's key considerations - fell to 6.6%, from 6.9%, lower than the consensus forecast of 6.7% and the bank's own forecast of 6.9%.
On the other side, the Bank of England will feel that the task is not yet complete because these figures are not yet consistent with inflation falling to the 2.0% target. Pockets of demand-side concerns also remain, with the ONS saying leisure and culture made the only significant positive contribution to this month's figures, rising from 6.0% year-on-year to 6.4%.
In general, the British government welcomed the developments, as it committed at the beginning of January to halve inflation by the end of the year. Meanwhile, it eases pressures on household and business balance sheets, materially improving the UK's economic outlook. For the British pound, this could be supportive and help explain why the decline in the British currency has been relatively limited.
Recently, the analysis from HSBC finds that underlying momentum in UK core inflation remains “slightly above average”. In this regard, Chris Hare, chief economist at HSBC Bank, says: “With annual wage growth remaining near 8%, the path towards 2% inflation is likely to be long and difficult.” HSBC adds that Labor market dynamics (leading to higher wages) mean that the Bank of England will not be in a position to cut interest rates until 2025, a view that suggests there is a major mispricing by financial markets that expect the cut to come, the first is in mid-2024.
Sterling forecast today:
The pound sterling has fallen in recent weeks as markets have moved to "price in" the possibility of interest rate hikes beyond 5.25% and increased the likelihood of rate cuts. Obviously, it is the way how these expectations develop from here will depend on upcoming inflation levels. Thus, if inflation comes in above expectations in the coming months, it could push the market to price in rate cuts, providing mechanical support for the pound sterling.
Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said the Bank of England will be able to cut interest rates as early as May as he believes inflation is heading towards its 2.0% target. The analyst added, "The UK consumer price report for October is supposed to reinforce expectations that the Monetary Policy Committee will be able to start cutting the bank rate in around six months."
Latest Forecasts for The Pound Against the Dollar
I still hold my technical view that gains for the pound sterling against the US dollar pair GBP/USD will be a target for selling. Clearly, the recent gains have moved the technical indicators towards strong overbought levels. Additionally, the US economy is still stronger than the UK economy, and the Federal Reserve's policy will remain more hawkish than the Bank of England's. Currently, the nearest resistance levels for the pair are 1.2475, 1.2520, and 1.2600, respectively. On the other hand, if the price of sterling/dollar breaks the support levels of 1.2320 and 1.2240, it would threaten the bulls' attempts to control the direction of the pair.
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