Pound Sterling strengthens as UK inflation increases beyond forecasts

During Thursday’s European trading session, the British pound (GBP) saw an uptick against most major currencies, with a few exceptions. This rise followed the announcement that the UK’s Consumer Price Index (CPI) had unexpectedly increased in December.

Recent data revealed that the annual inflation rate climbed to 3.4%, surpassing the anticipated 3.3% and up from 3.2% in November.

However, economists predict a significant slowdown in inflation in the upcoming months. Notably, the Bank of England’s cautious forecasts are expected to have minimal impact on this trend, especially as last year’s utilities and regulated pricing spikes will be omitted from year-on-year comparisons, as reported by Reuters.

Analysts from the National Institute for Economic and Social Research (NIESR) stated that the Bank of England (BoE) isn’t particularly troubled by these figures and anticipates a possible rate cut in the first half of this year. Investors are now looking ahead to Friday’s retail sales data for December and the preliminary S&P Global Purchasing Managers’ Index (PMI) figures for January.

It is anticipated that the retail sales figures will show a consistent decline, with a contraction of 0.1% month-on-month, marking the third consecutive yearly drop in the personal consumption index.

Daily Digest Market Mover: Investors await US PCE inflation data

• The British pound rose slightly against the US dollar (USD) to about 1.3450 during European trading. The GBP/USD pair has gained traction as the US dollar weakens, retaining its gains from Wednesday, largely due to easing geopolitical and trade tensions between the US and the EU.
• At the time of reporting, the US Dollar Index (DXY), which monitors the USD against six major currencies, hovers around 98.75.
• Tensions between the US and the EU have relaxed after President Donald Trump retracted his decision to impose 10% tariffs on several EU nations and the UK and also withdrew plans for US military action in Greenland following talks with NATO Secretary-General Mark Rutte.
• Additionally, Trump announced that the US government and NATO are close to a framework for a future agreement concerning Greenland and the broader Arctic region.
• The dispute regarding rights to Greenland had previously pressured the US dollar and US assets, leading to a risk-off sentiment as investors worried about the enduring relationship between the two largest economies, which, in turn, increased the appeal of European assets.
• In the US, the focus will now shift to Personal Consumption Expenditure Price Index (PCE) data from October and November scheduled for release at 3 PM Japan time. This data could influence market expectations for the Federal Reserve’s (Fed) monetary policy, with traders increasingly confident that interest rates will remain steady in the 3.50-3.75% range for the upcoming policy meeting later this month, as indicated by the CME FedWatch tool.

Technical Analysis: GBP/USD maintains 50% Fibonacci retracement at 1.3404

Currently, GBP/USD is steady around 1.3430. The 20-day exponential moving average (EMA) has stabilized following a steady rise, indicating some consolidation around this short-term average.

The 14-day Relative Strength Index (RSI) stands at 51, reflecting a neutral position, suggesting uncertainty among traders with no definitive movement direction as the pair stays stable.

Calculating from a high of 1.3795 to a low of 1.3012, the 50% Fibonacci retracement at 1.3404 serves as immediate support, while the 61.8% Fibonacci retracement at 1.3496 caps any rebounds. If the price breaks above 1.3496, it might signal a resurgence in momentum.