Pound Sterling declines despite hot UK CPI weighs on BoE dovish bets
by Sagar Dua · FXStreet- The Pound Sterling faces pressure against its major peers despite a faster-than-expected increase in UK inflation weighs on BoE rate cut bets for December.
- BoE’s Ramsden supports a less gradual easing approach as he is confident that the disinflation trend is intact.
- The Fed is expected to deliver fewer interest rate cuts ahead due to expectations of a high inflation outlook.
The Pound Sterling (GBP) slides to near 1.2630 against the US Dollar (USD) in Thursday’s North American session. The GBP/USD pair declines as the US Dollar Index’s (DXY) ticks up, with investors looking for fresh cues about the Federal Reserve (Fed) interest rate path.
Recently, traders pared Fed rate cut bets for December as investors expect President-elect Donald Trump’s policies on trade and taxes will be inflationary and growth-oriented, a scenario that would force the Fed to follow a more gradual policy-easing approach.
The Fed's probability of cutting interest rates by 25 bps to the 4.25%-4.50% range in December has come down to 52% from 72% a week ago, according to the CME FedWatch tool. Meanwhile, Fed policymakers have contradictory opinions about the likely Fed interest rate path.
On Wednesday, Boston Fed Bank President Susan Collins emphasized the need to push the monetary policy gradually towards a neutral range from its current restrictive state as she is confident about inflation remaining on track to the bank’s target of 2%. Meanwhile, Fed Governor Michelle Bowman said, "It's concerning to me that we're recalibrating policy, but we haven't yet achieved our inflation goal."
US Dollar PRICE Today
The table below shows the percentage change of US Dollar (USD) against listed major currencies today. US Dollar was the strongest against the Euro.
| USD | EUR | GBP | JPY | CAD | AUD | NZD | CHF | |
|---|---|---|---|---|---|---|---|---|
| USD | 0.04% | 0.02% | -0.76% | -0.17% | -0.39% | -0.11% | -0.22% | |
| EUR | -0.04% | -0.02% | -0.80% | -0.22% | -0.43% | -0.16% | -0.26% | |
| GBP | -0.02% | 0.02% | -0.76% | -0.20% | -0.43% | -0.14% | -0.24% | |
| JPY | 0.76% | 0.80% | 0.76% | 0.59% | 0.37% | 0.62% | 0.54% | |
| CAD | 0.17% | 0.22% | 0.20% | -0.59% | -0.21% | 0.07% | -0.04% | |
| AUD | 0.39% | 0.43% | 0.43% | -0.37% | 0.21% | 0.28% | 0.17% | |
| NZD | 0.11% | 0.16% | 0.14% | -0.62% | -0.07% | -0.28% | -0.11% | |
| CHF | 0.22% | 0.26% | 0.24% | -0.54% | 0.04% | -0.17% | 0.11% |
The heat map shows percentage changes of major currencies against each other. The base currency is picked from the left column, while the quote currency is picked from the top row. For example, if you pick the US Dollar from the left column and move along the horizontal line to the Japanese Yen, the percentage change displayed in the box will represent USD (base)/JPY (quote).
Daily digest marker movers: Pound Sterling weakens against majority of its peers
- The Pound Sterling weakens against most of its peers on Thursday even though traders doubt whether the Bank of England (BoE) will cut interest rates again in the December meeting. Market speculation for BoE rate cuts next month diminished after the release of the United Kingdom (UK) Consumer Price Index (CPI) data for October on Wednesday showed that price pressures accelerated faster than expected.
- UK’s headline inflation came in higher than the bank’s target of 2%, the core CPI, which excludes volatile items, accelerated unexpectedly, and the service inflation, which BoE officials closely track, grew at a faster pace of 5%. It seems the headline inflation is on track to where the Monetary Policy Committee (MPC) projected at the start of the month. The MPC forecasted inflation at 2.4% and 2.5% in November and December, respectively.
- The inflation data underscores BoE Governor Andrew Bailey’s advice of adopting a gradual policy-easing approach in his commentary at the press conference after the policy decision of cutting interest rates by 25 basis points (bps) to 4.75% on November 7.
- On the contrary, BoE Deputy Governor Dave Ramsden said after the inflation data release on Wednesday that he expects the economy to “continue to normalize” with an ongoing trend toward “low and relatively stable inflation,” Bloomberg reported. The comments from Ramsden appeared to be dovish as he said that he would consider a less gradual rate-cut approach if the evidence starts to “point more clearly to further disinflationary pressures.”
- Going forward, investors will pay close attention to the Retail Sales data for October and flash S&P Global/CIPS Purchasing Managers Index (PMI) data for November, which will be published on Friday.
Technical Analysis: Pound Sterling strives to sustain above 1.2600
The Pound Sterling starts declines towards the six-month low near 1.2600 against the US Dollar on Thursday. The establishment of the GBP/USD pair below the 200-day Exponential Moving Average (EMA) near 1.2850 suggests that the overall trend is bearish.
The 14-day Relative Strength Index (RSI) remains within the 20.00-40.00 level, indicating a strong bearish momentum.
Looking down, the psychological support of 1.2500 will be a major cushion for Pound Sterling bulls. On the upside, the Cable will face resistance near 200-day EMA.
BoE FAQs
What does the Bank of England do and how does it impact the Pound?
The Bank of England (BoE) decides monetary policy for the United Kingdom. Its primary goal is to achieve ‘price stability’, or a steady inflation rate of 2%. Its tool for achieving this is via the adjustment of base lending rates. The BoE sets the rate at which it lends to commercial banks and banks lend to each other, determining the level of interest rates in the economy overall. This also impacts the value of the Pound Sterling (GBP).
How does the Bank of England’s monetary policy influence Sterling?
When inflation is above the Bank of England’s target it responds by raising interest rates, making it more expensive for people and businesses to access credit. This is positive for the Pound Sterling because higher interest rates make the UK a more attractive place for global investors to park their money. When inflation falls below target, it is a sign economic growth is slowing, and the BoE will consider lowering interest rates to cheapen credit in the hope businesses will borrow to invest in growth-generating projects – a negative for the Pound Sterling.
What is Quantitative Easing (QE) and how does it affect the Pound?
In extreme situations, the Bank of England can enact a policy called Quantitative Easing (QE). QE is the process by which the BoE substantially increases the flow of credit in a stuck financial system. QE is a last resort policy when lowering interest rates will not achieve the necessary result. The process of QE involves the BoE printing money to buy assets – usually government or AAA-rated corporate bonds – from banks and other financial institutions. QE usually results in a weaker Pound Sterling.
What is Quantitative tightening (QT) and how does it affect the Pound Sterling?
Quantitative tightening (QT) is the reverse of QE, enacted when the economy is strengthening and inflation starts rising. Whilst in QE the Bank of England (BoE) purchases government and corporate bonds from financial institutions to encourage them to lend; in QT, the BoE stops buying more bonds, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive for the Pound Sterling.
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