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Pound weakens as inflation data disappoints markets

INVESTINGPound weakens as inflation data disappoints markets

This morning, the Pound weakened. This is the effect of the announcement of inflation data for November. Consumer prices fell more strongly than expected, fuelling speculation about a possible lowering of interest rates as early as this summer by the Bank of England. The GBP/USD rate fell from a level of 1.2725 and approached 1.2650.

Inflation in the UK turned out to be significantly lower than expected in November, and the markets are currently pricing in as much as 140 basis points in interest rate cuts for next year. Perhaps these market expectations have gone a bit too far, considering the recent hawkish stance of Governor Andrew Bailey.

The fall in the headline index below 4% is a big surprise. Expectations indicated a level of 4.4%. The base measure was set at 5.1% year-on-year. In this case, too, forecasts indicated a higher value (5.6%). There is a visible fall in prices in most categories.

The Bank of England will certainly be happy with lower price pressure in services. Here, inflation fell to 6.3% after reaching a peak level of 7.4% in the summer. Although, just last week the institution argued that this downward trend is not fully associated with economic factors, suggesting that some of this movement is just statistical noise.

Despite today’s surprise, inflation in services at the beginning of next year should still fluctuate around the level of 6%. At first glance, this would justify the Bank of England’s more cautious approach at last week’s meeting. The BoE has taken a decidedly different line than the Federal Reserve and sounded more “hawkish,” while the American institution signaled a turnaround in policy and interest rate cuts are quite possible in the first half of the year. However, the BoE is likely to remain much more cautious, which may support the GBP in relation to the USD.

Despite today’s GBP/USD rate drops, quotations are still moving within the upward channel that has been ongoing since the end of October. The increase has accelerated recently after the decision of the Fed and then the BoE. The local peak close to the level of 1.28 currently represents a key technical resistance. The lower band of the mentioned channel seems to be the support for now.

– Łukasz Zembik, Oanda TMS Brokers

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