Pound Sterling bore the brunt of the damage Wednesday, falling sharply against the US Dollar. It fell to almost 1.3340 immediately after the release of a poor inflation report from the UK. During the European session GBP/USD aggressively reversed to below 1.3320. The fiduciary duty malaise is a possible cause. One possible reason that has investors worried is this unprecedented decline. Recent economic indicators have indicated that UK inflation is coming down quicker than anticipated. This has led to heightened expectations for earlier Bank of England (BoE) interest rate cuts.
The recent inflation data has led to a dramatic decline in GBP/USD. On top of that, the US Dollar has undergone a dramatic surge. The prevailing economic climate, illustrated by the recent sell-off in the GBP/USD pair, has forced traders to see things anew. 50% Fibonacci retracement at 1.3399 is near-term resistance for the currency pair. This is a sign that future upward momentum could be capped in the near term.
GBP/USD has found it hard to hold its gains in recent trading sessions, particularly above Tuesday’s high at 1.3456. Any sustained break above this level would likely open the way towards the 1.3500 psychological barrier. Conversely, a daily close below the critical 38.2% retracement level at 1.3307 could signal further declines for the currency pair, potentially moving towards the 23.6% retracement around 1.3200.
The short-term outlook for GBP/USD is moderately bullish. The pair remains above the rising 20-day Exponential Moving Average (EMA) at 1.3305. As a lagging technical indicator, this would imply that upwards short-term continuation may still be in play. Market sentiment more and more comes down to the reaction to the economic data – honest.
The UK’s employment data for the three months to the end of October revealed a second consecutive increase in the ILO Unemployment Rate. It jumped to 5.1%, its highest level in almost five years. This spike in unemployment as well as lackluster wage growth are starting to make us question just how strong this labor market really is. Core Consumer Price Index (CPI) figures exceeded expectations with a slight increase of 3.2%. Yet this increase was disappointing both compared with expectations and the 3.4% increase realized last year.
Meanwhile, in October, headline inflation increased by 0.4%. Year-on-year, it grew by 3.1%, but month-on-month it deflated by 0.2%, which caught many off guard, expecting flatness at worst. Taken together, these data points suggest that inflationary pressures are cooling. Such a trend could lead the Bank of England to take a more dovish tone in its next monetary policy meeting, set for Thursday.
“Moving monetary policy near or into accommodative territory, which further Federal Funds Rate cuts will do, risks exacerbating already elevated inflation and untethering the inflation expectations of businesses and consumers.” – Raphael Bostic
Investors are widely focused on the upcoming US Consumer Price Index (CPI) data for November. Coming out this Thursday and especially in this current economic climate, there’s a lot of excitement around it. Analysts expect this report to be the one that continues to drive market movements and expectations about the impending monetary policy shift.
These developments are keenly awaited by market participants. At the same time, the 14-day Relative Strength Index (RSI) has fallen to 56, not having achieved overbought levels and showing a high chance of bearish reversal for GBP/USD. This highly technical indicator fits into the larger national narrative of inflationary troubles and the big picture transformations in our workforce.