The United Kingdom's bond market is experiencing significant turmoil, signaling a grim economic outlook exacerbated by rising inflationary concerns in the United States. Investors and economists are turning their attention to the upcoming Consumer Price Index (CPI) data for December, set to be released by the UK's Office for National Statistics (ONS) on Wednesday at 07:00 GMT. The expectation is for the headline CPI inflation to rise to 2.7% in December, while the core inflation figure is anticipated to cool slightly. This data release comes at a crucial time, as it could significantly impact the British Pound Sterling amid the Bank of England's (BoE) cautious policy stance.
The bond market rout reflects broader economic anxieties, with UK bonds witnessing a sell-off as investors brace for the upcoming CPI figures. Analysts predict that the services CPI will decrease from a year-on-year rate of 5.0% in November to 4.8% in December. Concurrently, the BoE had opted to maintain its benchmark policy rate at 4.75% during its December meeting, reflecting a divided stance among policymakers. While three members of the Monetary Policy Committee (MPC) voted for a rate reduction, six members preferred holding steady. The BoE anticipates the annual headline CPI to be 2.5% and the services CPI to be 4.7% for December.
Moreover, British monthly CPI is projected to rise by 0.4% in December, compared to the previous growth of 0.1%. The core CPI, which excludes volatile components such as energy, food, alcohol, and tobacco, is expected to edge slightly lower to 3.4% year-on-year. Such figures indicate a nuanced economic scenario that may influence the BoE's gradual approach towards future interest rate adjustments.
“We think a gradual approach to future interest-rate cuts remains right. But with heightened uncertainty in the economy, we can’t commit to when or by how much we will cut rates in the coming year.” – Andrew Bailey
With the UK CPI report looming, its implications on Pound Sterling are under scrutiny. A hotter-than-expected headline and core inflation could reinforce the BoE's cautious easing stance, affecting currency movements. This sentiment resonates with BoE Governor Andrew Bailey's recent comments suggesting a measured approach to interest rate cuts amid economic uncertainty.
On the global front, currency markets are also reacting to these developments. In the Asian session on Wednesday, the USD/JPY pair oscillated near 158.00, reflecting subdued US Dollar price action ahead of a crucial US CPI report. According to Dhwani, a financial analyst, the USD/JPY pair could initiate a meaningful recovery if it surpasses the 1.2300 round level, potentially testing the January 9 high of 1.2367.
“The pair could initiate a meaningful recovery on acceptance above the 1.2300 round level, above which the January 9 high of 1.2367 will be tested. The next upside target is seen at the 21-day Simple Moving Average (SMA) at 1.2462. On the flip side, the immediate support is seen at the 14-month low of 1.2100, below which the 1.2050 psychological barrier will come into play.” – Dhwani
Similarly, the GBP/USD pair faces potential recovery from over a year's low if it can break above the same critical level of 1.2300. Analysts highlight that GBP/USD is heavily oversold on the daily time frame ahead of the UK CPI data release.
“GBP/USD is heavily oversold on the daily time frame ahead of the UK CPI data release, with the 14-day Relative Strength Index (RSI) holding below 30. Therefore, the pair appears primed for a brief recovery in the near term.” – Dhwani Mehta
Market participants are closely monitoring these currency dynamics as they navigate through an environment fraught with economic uncertainties. The situation is further complicated by predictions from TD Securities analysts regarding potential decelerations in core and services inflation, despite expectations for a headline increase.
“We look for the headline of 2.7% but the more important core and services are likely to see decelerations, especially services, which we expect to fall from 5.0% YoY in November. That said, there remains big uncertainty about airfares, which were likely very weak in the month on account of the survey data.” – TD Securities analysts