- The British pound recovered against other major currencies during yesterday's session after inflation in the UK rose more than expected, leading financial markets to ease expectations of imminent interest rate cuts from the Bank of England.
- Also, the GBP/USD pair recovered from losses extending to the support level of 1.2596, with gains to the resistance level of 1.2696 before stabilizing around the 1.2675 level at the start of today's session.
In general, the markets were well positioned to allow the bank to cut interest rates in March, but the Office for National Statistics reported that the UK's main consumer price index inflation rose from 3.9% in November to 4.0% annually in December. Obviously, that was beating consensus expectations for another decline to 3.8%. This increase was helped by a monthly rise of 0.4% from -0.2% previously, which was stronger than the 0.2% rise those markets expected.
Meanwhile, core inflation rose by 5.1% annually in December, unchanged from the previous month and exceeding estimates of 4.9%. This was driven by a monthly rise of 0.6%, up from -0.3% and ahead of consensus expectations of 0.4%. Moreover, the inflation data suggests that market expectations for interest rate cuts from the Bank of England will need to be revised down, which could support British bond yields and the pound sterling.
Commenting on the performance of the pound sterling, Kenneth Broussard, an expert at Société Générale, said, "The pound sterling is maintaining its gains in the G10, supported by a 12-basis point rise in yields on UK government bonds due in two years and 10 basis points in yields on UK government bonds due in 10 years." Richard Carter, head of interest rate research at Quilter Cheviot, said, "While this increase does not lift the number significantly, it shows that Britain's battle against inflation is not yet over, and the situation remains risky."
In general, expectations of a downward surprise were reinforced by a number of economic forecasts released last week that UK inflation would fall to the 2.0% target as early as April. The fact is that recent trends - reminiscent of the unexpected declines in October and November - suggest that inflation was on track to reach this destination. However, the Bank of England has warned against complacency. Also, today's surprise hot number will justify the bank's preferred position of keeping interest rates at their current level for an extended period.
The pound sterling was one of the best-performing major currencies in 2024, supported by the stability of expectations of interest rate cuts in the UK. This inflation data will add to expectations that the bank will not be able to cut interest rates as aggressively as market expectations suggested, providing more support for the currency.
According to analysts, there is still enough evidence to suggest that the Bank of England will cut interest rates in March. 43% of the inflation basket is still experiencing price declines, with an average reading of the unadjusted measure at 0.2%, on a monthly basis. Michael Hewson, chief market analyst at CMC Markets, said that all the signs now point to a rate cut in June. He explained that today's UK inflation figures serve to reinforce the challenge facing the Bank of England in bringing inflation back to target and show that the process is unlikely to be linear. Regarding expectations for the timing of the first cut: "The first quarter was never a realistic possibility at all."
Ultimately, it is noteworthy that market prices reveal that investors have postponed the timing of the first reduction to mid-summer, which confirms the superior performance of the pound during the day.
GBPUSD Expectations and Analysis Today:
GBP/USD forecasts show that the currency pair is on a downward correction path and breaking the support level of 1.2600. Obviously, as happened in the middle of the week’s trading, this will support the strength and control of the bears, and prepare for stronger support levels. Technically, the closest ones after that are 1.2545 and 1.2480, which are sufficient to push the technical indicators towards strong saturation levels. On the other hand, according to the performance on the daily chart, the bulls will not regain control over the direction of the sterling dollar without moving towards the 1.2775 resistance level again. Today, the sterling/dollar pair will interact with the performance of global financial markets and investor sentiment, in addition to the announcement of the number of weekly US jobless claims, the reading of the Philadelphia industrial index, and the US housing market numbers.
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