POUND STERLING RECOVERS FURTHER AS TRADES UNWIND BOE RATE-CUT BETS

Pound Sterling has climbed to near 1.2700 as hopes of an early rate cut by the BoE have waned.

UK Inflation remains stubbornly high due to higher fuel costs and seasonal airfare prices.

Investors await the UK Retail Sales data for further guidance.

The Pound Sterling (GBP) recovers swiftly as stubbornly high UKConsumer Price Index (CPI) data for December has pushed back expectations of early rate cuts by the Bank of England (BoE). The GBP/USD pair is expected to witness more upside as investors hope that the Federal Reserve (Fed) will start reducing interest rates earlier than the BoE. 

BoE policymakers are expected to remain on their toes as the UK economic outlook is vulnerable and price pressures are significantly stubborn. Going forward, the Pound Sterling will be guided by the Retail Sales data for December, which is set to be released on Friday. Upbeat consumer spending data would further diminish hopes of an early rate cut by the BoE.

Daily Digest Market Movers: Pound Sterling rise further as US Dollar corrects gradually

Pound Sterling climbs to near the round-number-level resistance of 1.2700 as investors see no early discussions about interest rate cuts from Bank of England policymakers. This comes after consumer price inflation in the United Kingdom economy remained stubbornly higher in December. 

The UK inflation remained surprisingly sticky, prompted by higher fuel prices, a slight rise in service inflation and an increase in seasonal airfares.

Annual headline inflation grew strongly by 4.0% against 3.9% increase in November while market participants projected a deceleration to 3.8%. 

In the same period, the core inflation – that strips out volatile food and Oil prices – remained sticky at 5.1%. Investors had anticipated 4.9%.

The consumer price inflation remains higher despite the BoE maintaining interest rates at elevated levels. This is expected to discourage BoE policymakers from endorsing interest rate cuts in the near-term.

Investors should note that the economic outlook of the UK economy is vulnerable and fears of a technical recession are high. 

As per the revised estimate from the UK Office for National Statistics (ONS), the British economy shrank by 0.1% in the third quarter of 2023 and is not expected to deliver any sort of growth in the final quarter of 2024.

It would be challenging for BoE policymakers to decide on whether to adopt a dovish approach to avoid a technical recession or maintain a restrictive monetary policy stance.

Going forward, market participants will focus on UK Retail Sales for December, which will be published on Friday.

Monthly Retail Sales will have contracted by 0.5% after increasing at a robust pace of 1.3% in November, as per estimates. Annual consumer spending is to have risen by 1.1% against a slight increase of 0.1% in November.

Investors anticipate that annual Retail Sales excluding fuel prices grew by 1.3% versus. former reading of 0.3%.

Meanwhile, the US Dollar Index (DXY) has corrected gradually to near 103.25 after printing a fresh monthly high at 103.70. The USD Index is expected to resume its upside journey as trades pare bets supporting a rate cut from the Federal Reserve (Fed) in March. 

Going forward, action in the FX domain will be guided by guidance from Federal Reserve policymakers on interest rates. Fed policymakers are consistently endorsing a restrictive interest rate stance amid lack of confidence among investors that inflation will progressively return to the 2% target in a sustainable manner.

Technical Analysis: Pound Sterling aims to climb above 1.2700

Pound Sterling has delivered a sharp recovery to near 1.2700 after discovering strong buying interest around a fresh monthly low of 1.2600. The GBP/USD pair recovered sharply after testing the 50-day Exponential Moving Average (EMA), which oscillates around 1.2620. The Cable is struggling to shift auction above the 20-day EMA, which trades around 1.2700. 

The 14-period Relative Strength Index (RSI) has shifted into the 40.00-60.00 range, which indicates a listless performance