The British pound (GBP) struggled against other major currencies on Wednesday following a report from the Office for National Statistics (ONS) that showed inflation climbed more than anticipated in December.
The annual inflation rate in Britain reached 3.4%, surpassing the expected 3.3% and the 3.2% from November. Month-on-month, the Consumer Price Index (CPI) rose by 0.4%, which was in line with projections, bouncing back from a 0.2% decline in November.
The core CPI, which does not include volatile elements like food and energy, remained stable at a year-on-year rate of 3.2%, as expected.
Inflation within the services sector, an area of close attention for the Bank of England (BoE), increased to 4.5%, slightly up from the previous year’s 4.4%.
Given the persistent price pressures, market expectations for potential rate cuts from the central bank may be dampened. In its December meeting, the BoE suggested a steady yet cautious approach to monetary policy.
Now, all eyes are on the retail sales data for December and the preliminary S&P Global Purchasing Managers Index (PMI) for January, set to be released on Friday.
Market Digest: Trump’s speech at Davos as a key trigger for markets
- On Wednesday, the GBP dropped against the US dollar (USD) to about 1.3410 during European trading hours. This decline aligns with a stronger US dollar, as investors anticipate President Donald Trump’s upcoming speech at the World Economic Forum (WEF) in Davos.
- At the moment, the US Dollar Index (DXY), which gauges the USD against six major currencies, ticked up 0.13% to around 98.70, remaining near a two-week low of 98.20 recorded on Tuesday.
- The USD has been under pressure lately due to tensions between the US and EU nations regarding Greenland’s future. Trump recently threatened to impose 10% tariffs on certain European countries and the UK for their opposition to the US’s Greenland plans.
- In retaliation, various EU officials and member states condemned Trump’s tariff threat, labeling it as “blackmail.” European Central Bank (ECB) President Lagarde voiced her concern, stating that such threats could damage US-EU relations, and that businesses in both regions face uncertainty regarding the potential impacts of new tariffs.
- Trump’s address at Davos is being closely monitored for insights into potential actions the US might take to pressure EU nations concerning Greenland.
- On the domestic front, there’s anticipation surrounding the announcement of a new Federal Reserve chair, which could occur as early as next week, with Treasury Secretary Scott Bessent mentioning that four candidates are being considered for the role.
Technical Analysis: GBP/USD Faces Challenges Above 20-Day EMA
As of now, GBP/USD has fallen to around 1.3405. The prices are just below the 20-exponential moving average (EMA) of 1.3429, indicating a consolidation phase after a steady rise.
The 14-day Relative Strength Index (RSI) stands at 53, suggesting a slight uptick in momentum. If we look at the shift from the peak of 1.3789 to the low of 1.3006, a pullback would meet a 61.8% retracement at 1.3490, with the significant 50% retracement level at 1.3397.
An RSI above 60 might reinforce bullish momentum, while a dip below 50 could revive bearish sentiment. A daily close above the retracement resistance could extend the rally, whereas a retreat below the 20 EMA might stir a broader rebound.
FAQs about Inflation
Inflation refers to the rise in prices of a typical basket of goods and services. The headline inflation rate is usually expressed as a percentage change both month-over-month and year-over-year. Core inflation, which excludes the more volatile components such as food and fuel, is the figure that central banks target to maintain manageable inflation levels, often around 2%.
The Consumer Price Index (CPI) gauges how the prices of a selection of goods and services change over time, presented as percentage variations on both a monthly and annual basis. Core CPI, which central banks focus on, excludes those volatile food and fuel components. Generally, if core CPI climbs above 2%, interest rates rise, which tends to strengthen the currency; this is reversed when it falls below that threshold.
It may seem odd, but high inflation rates can lead to an appreciation in a country’s currency, while low inflation generally sees the opposite effect. This occurs because central banks often increase interest rates to combat increasing inflation, attracting global capital from investors seeking better returns.
Historically, gold has been considered a safe asset in times of high inflation due to its stable value. While it’s still sought after during extreme market instability, this isn’t the case all the time. Rising interest rates, typically a result of increasing inflation, raise the opportunity cost of holding gold compared to interest-bearing assets, which decreases its attractiveness. Conversely, lower inflation rates generally make gold a more viable investment as interest rates tend to fall.
