Dec 22, 2023

GBPUSD could surrender recent gains on a Fed rate cut after UK inflation slowed further. 


GBPUSD – Daily Chart

GBPUSD was rejected by resistance at the 1.2734 level, and a correction to the 1.25 level could be seen. 

The UK Office for National Statistics said the country’s inflation fell to 3.9% in November, down from 4.6% in October. That was the lowest level since September 2021 and well below the 4.4% expected by economists. Falling fuel costs drove the price drop alongside slowing food inflation. 

Markets are now seeing a 50/50 chance of the Bank of England cutting interest rates as early as March next year, from the current 5.25% to 5%, and a near-80% chance of a cut by May. There are also expectations that rates could be as low as 3.75% by next year. 

The pound had been gaining on the pause in US rate hikes and the recent pivot to cut talk. But now that UK rates may follow the US lower, markets will look at the UK’s weaker economy compared to the US. That could drive a further correction in the pound. 

Neil Wilson, chief market analyst at Finalto, said the inflation figures were “a Christmas gift for the chancellor, the Bank of England and the economy”. 

Friday has UK growth data at 3pm HKT, a final reading expected at 0.6%, but the economy has been weaker. US PCE and consumer sentiment numbers will follow that in the evening. If the data supports this, traders should look for a potential pullback in recent GBPUSD gains.

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