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Sterling struggles amid risk-on sentiment, easing BoE rate cut bets

by SuperiorInvest


  • Sterling faces pressure near 1.2700, although hopes of an early BoE rate cut have faded.
  • Inflation in the UK remains stubbornly high due to higher fuel costs and seasonal airfares.
  • Investors await UK retail sales data for further guidance.

The pound sterling (GBP) is hovering between risk-on market sentiment and stubbornly high UK consumer sentiment Price index data (CPI) for December. High UK inflation data dampened expectations of an early rate cut by the Bank of England (BoE). The GBP/USD pair is expected to see more gains as investors hope the Federal Reserve (Fed) will start cutting interest rates rates before the BoE.

BoE policymakers are expected to remain vigilant as the UK’s economic outlook is vulnerable and price pressures significantly stubborn. Going forward, sterling will be guided by retail sales data for December, which will be released on Friday. Positive consumer spending data would further dampen hopes of an early BoE rate cut.

Daily Digest Market Movers: Sterling falls as market sentiment sours

  • The pound’s rally stalled after climbing near resistance at the round number 1.2700 level.
  • The broader appeal has been unaffected as investors see no imminent interest rate cut discussions from Bank of England policymakers. This comes after consumer price inflation remained stubbornly higher in the UK economy in December.
  • Inflation in the UK remained surprisingly sticky, driven by higher fuel prices, a slight rise in services inflation and an increase in seasonal air fares.
  • Year-on-year headline inflation rose sharply to 4.0% from a 3.9% rise in November, while market participants had expected a slowdown to 3.8%.
  • Over the same period, core inflation – which strips out volatile food and oil prices – remained at 5.1%. Investors expected 4.9%.
  • Consumer price inflation remains higher despite the BoE keeping interest rates at elevated levels. This is expected to discourage BoE policymakers from agreeing to cut interest rates in the near term.
  • Investors should note that the economic outlook for the UK economy is vulnerable and fears of a technical recession are high.
  • According to a revised estimate by the UK Office for National Statistics (ONS), the UK economy shrank by 0.1% in the third quarter of 2023 and is not expected to produce any growth in the final quarter of 2024.
  • It would be challenging for BoE policymakers to decide whether to take a dovish approach to avoid a technical recession or maintain a tight monetary policy.
  • Going forward, market participants will focus on UK retail sales for December, which will be published on Friday.
  • Monthly retail sales are estimated to have declined 0.5% after rising at a strong 1.3% pace in November. Annual consumer spending is expected to rise 1.1%, up from a modest 0.1% gain in November.
  • Investors expect annual retail sales excluding fuel prices to have risen 1.3%. an earlier reading of 0.3%.
  • Meanwhile, the US dollar index (DXY) rebounded to near 103.60 as investors’ risk appetite eased. The USD index is expected to continue its upward path as it trades bets on support for a rate cut by the Federal Reserve (Fed) in March.
  • Going forward, FX action will be guided by guidance from Federal Reserve policymakers regarding interest rates. Fed policymakers have consistently endorsed a tight stance on interest rates amid a lack of confidence among investors that inflation will gradually return to the 2% target in a sustainable manner.

Technical Analysis: Sterling faces pressure around 1.2700

After seeing strong buying interest around the new monthly low of 1.2600, Sterling saw a sharp recovery to near 1.2700. The GBP/USD the pair recovered sharply after testing the 50-day exponential moving average (EMA), which oscillates around 1.2620. However, Cable is looking to move the auction above the 20-day EMA, which is trading around 1.2700.

The 14-time Relative Strength Index (RSI) has moved into the 40.00-60.00 range, indicating lethargic performance.

Frequently asked questions about interest rates

Interest rates are charged by financial institutions on loans to borrowers and are paid as interest to savers and depositors. They are influenced by the base interest rates that central banks set in response to changes in the economy. Central banks are usually mandated to ensure price stability, which in most cases means aiming for a core inflation rate of around 2%.
If inflation falls below target, the central bank can cut key interest rates to stimulate lending and stimulate the economy. If inflation rises substantially above 2%, this usually results in the central bank raising key lending rates in an attempt to reduce inflation.

Higher interest rates generally help strengthen a country’s currency by making it a more attractive place for global investors to park their money.

Higher interest rates overall weigh on the price of gold because they increase the opportunity cost of holding gold instead of investing in an interest-bearing asset or putting cash in the bank.
If interest rates are high, this usually pushes up the price of the US dollar (USD), and since gold is valued in dollars, this has the effect of lowering the price of gold.

The Fed funds rate is the overnight rate at which US banks borrow from each other. It is the often quoted key rate set by the Federal Reserve at FOMC meetings. It is set as a range, for example 4.75%-5.00%, although the upper limit (5.00% in this case) is the given figure.
Market expectations for the future Fed funds rate are tracked by CME’s FedWatch tool, which determines how many financial markets are behaving in anticipation of future Federal Reserve monetary policy decisions.

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