- The price of the pound sterling fell against the rest of the other major currencies after inflation in Britain came below expectations and kept hopes alive that the Bank of England would begin reducing interest rates in the summer.
- According to Forex currency market trading, the price of the British pound against the US dollar GBP/USD declined towards the support level of 1.2535, near its lowest in two months.
- Also, the pound dropped against the euro to 1.1730 after the announcement of the UK's Consumer Price Index inflation reading at 4.0% on a yearly basis, unchanged from December but lower than the market's forecast of 4.2% and the Bank of England's 4.1% prediction for 2018.
- Ultimately, this follows the policy update in February.
Obviously, this followed the announcement of a monthly change of -0.6%, a decrease from December's +0.4% and well below the market's expectation of -0.3%. Commenting on the event and its impact, Thanem Islam, Head of Forex Currency Analysis at Equals Money, said, "UK inflation surprised to the downside, erasing recent gains made by the pound following better-than-expected wage figures."
GBP/USD losses deepened after the release of the core CPI reading, which came in at 5.1% year-on-year, unchanged from December and below expectations of 5.2%. for its part, The Bank of England said inflation will fall sharply to its 2.0% target as soon as April, largely due to the upcoming cut in energy bills, but will then recover steadily to around 3.0% by the end of the year, reinforcing the view that inflation will remain sticky above 2.0%.
Obviously, this is because underlying inflationary pressures associated with wage increases above inflation will continue to frustrate the Bank's target of 2.0%. So, although markets appear to be more comfortable betting on interest rate cuts by the Bank of England, core inflation may keep expectations in check, providing support to sterling.
Generally, these data for January confirm that core UK inflation remains high and that the Bank of England is right to remain vigilant and keep interest rates steady for some time to come. Conversely, the shortfall from expectations will provide policymakers with some respite in light of strong inflation in the US this week and will maintain market confidence in the possibility of interest rate cuts by the summer. Thus, if inflation exceeded expectations, the possibility of interest rate cuts falling into the fall was a real possibility.
Overall, the British pound should ultimately remain supported against European currencies, given the weak inflation dynamics emerging in Europe, and post-release losses should remain limited to recent ranges. However, downside risks against the dollar are increasing, as it appears that the Bank of England may find itself in a position to cut interest rates before the US Federal Reserve's decision. At the same time, the Bank of England is particularly concerned about the persistence of services inflation linked to high wages and would want to see further progress in this component before cutting interest rates. Eventually, some analysts believe that the three-month annual economic growth in the Bank of England's preferred services CPI slowed to 3.7%, the lowest rate since February 2022, down from 3.7%. 4.7% in December.
GBPUSD Expectations and Analysis Today:
According to the performance on the daily time frame chart, the recent movement of the British pound against the US dollar “GBP/USD” towards and below the support level of 1.2500 will give the bears a strong opportunity to control the trend. Especially, in the case of the British economic growth numbers, along with the industrial production reading, come in below expectations and the numbers remain US economic data is stronger than expected. Technically, the GBP/USD pair may continue its downward collapse, and the next most important support levels will be 1.2455 and 1.2370, respectively, which are sufficient for the technical indicators to move towards strong selling saturation levels. On the other hand, over the same time period, and as I mentioned before, the movement of the GBP/USD pair towards the resistance 1.2775 will give the bulls enough momentum to control the currency pair again.
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