The pound sterling fell after it was reported that British inflation slowed by a much larger margin in November than financial markets had expected. As a result, the price of the GBP/USD currency pair moved towards the support level of 1.2625 after moving towards the resistance level of 1.2732 in the same trading session. Recently, the pair's highest price this week was the resistance level of 1.2762, and we recommended selling the pair near that peak.
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Meanwhile, the pound's exchange rate fell after the Office for National Statistics said that British inflation fell from 0% on a monthly basis in October to -0.2% in November, which was below the market's expected increase of 0.2%. Also, Markets had raised their expectations for a rate cut from the Bank of England in 2024 after consumer price inflation recorded 3.9% year-on-year in November. Clearly, it was down from 4.6% in October, while the market had expected a reading of 4.3%.
Generally, investors are betting that there is now enough progress in inflation to allow the Bank of England to become more comfortable with the idea of a rate cut in 2024. In this regard, Thanneem Islam, head of FX analysis at Equals Money, says: "The pound's priced-in cuts, unsurprisingly, are falling." For his part, Viraj Patel, an analyst at Vanda Research, says that a rate cut in May is now "straightforward": "This actually contradicts the idea that inflation in the UK is more stable than anywhere else; it really isn't."
Also, according to the announcement, the level of inflation in the services sector, which the Bank of England monitors in particular, decreased from 6.6% on an annual basis to 6.3% in November. Core inflation, another area of interest to the bank because it strips out volatile energy and food and gives a better reflection of domestic inflation pressures, rose 5.1% year-on-year, down from 5.7% and below expectations of 5.5%. To put this negative surprise in context, the lowest estimate among 28 economists surveyed by Bloomberg was 5.2%. shortly, the result came from an unexpected core inflation reading of -0.3% m/m in November, down from 0.3% in October and below the consensus of 0.2%.
Meanwhile, the pound sterling price has taken a hit in the near term, lower inflation has been better for UK consumers and boosts Britain's economic outlook. Thus, this should be a supportive development for the British pound in the medium term. For his part, Jake Finney, an economist at PricewaterhouseCoopers, says that the decline in inflation provides strong evidence that deflationary pressures are increasing in the United Kingdom. He added: “Headline, core and services inflation are now well below the Bank of England’s expectations in the latest monetary policy report for November. “Next month’s inflation data is likely to follow a similar trend.”
Overall, economists still expect headline UK inflation to rise slightly early in the new year as the CPI basket is reweighted and the cap on household energy prices increases by 5%. In response to the positive inflation surprise, the Overnight Index Swaps (OIS) market showed that investors added to their interest rate cut bets for 2024 and 2025.
Furthermore, the OIS market suggests that investors are now looking at approximately five cuts in 2024, with the bank rate falling from 5.25% to around 4.0%, followed by four more cuts in 2025 to a year-end rate of 3.0%. Despite the decline in inflation, some economists warn that market expectations about the timing of the first rate cut in May, as well as the total cut for 2024, are overblown.
GBPUSD Expectations and Analysis Today:
GBP/USD forecasts show that bulls are still looking for more stimulus to complete the recent upward rebound, which is supported by breaking the 1.2700 resistance. Moreover, the weakness of the results of the British economic data prevents this. So, if the results of the American data are led by the announcement of the economic growth rate and the number of claims the weekly unemployment rate, better than expectations, may increase the selling of the sterling dollar. Therefore, the destination may be available to move towards the support levels of 1.2600, 1.2545, and 1.2480, respectively. In the event of the opposite, bulls may attempt to break the upper resistance of 1.2795 for the currency pair during trading in the last month of the year 2023. Finally, we still prefer selling GBP/USD at every rising level.
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