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GBP/USD surged by 0.25% as a result of the UK’s surprise 4% annual increase in inflation. GBP’s upside is limited by obstacles such as the moderate rate of cut by the Fed and the improvement in US retail sales. In contrast to the anticipated Fed rate decrease in March, the Bank of England is under pressure from the UK’s growing inflation.
Following a strong report from the Office for National Statistics that outperformed US Retail Sales statistics for December, the pound sterling saw some significant gains against the US dollar on Wednesday. Not all has been said, though, as the GBP/USD recovered some of its gains and is now up 0.25% at 1.2667 after plunging as low as 1.2596.
Rise in UK inflation may discourage the BoE from lowering interest rates, which would be positive for GBP/USD. According to US Department of Commerce data, month-over-month growth in retail sales in December was 0.6%, exceeding predictions. Concurrently, sales increased at a 5.6% annual pace in the 12 months ending in December, surpassing November’s 4% growth.
The US Fed has reported that Industrial Production increased by 0.1% over the same time period. This represents a significant turnaround following a 0.0.8% decline in October and a 0% reading the following month.
The Greenback continued to be in control following the data, which was detrimental to the GBP/USD pair. Following Fed Governor Waller’s comments, which emphasised that there’s “no reason to move as quickly or cut as rapidly as in the past,” the US dollar gained strength. Waller supported rate decreases as long as inflation continued to trend stably towards its 2% target, but he also kept investors in check.
In the UK, the ONS reported that December had the biggest increase in inflation for the first time in ten months, adding to the pressure on the Bank of England (BoE). The Pound Sterling increased in value relative to the US Dollar and the Euro (EUR) as a result. Data revealed that underlying inflation exceeded the 5% target, while annual inflation increased by 4%, above the consensus estimate of 3.8%.
The better than anticipated readings for both core and services inflation in December, according to sources cited by Reuters, “are disappointing and will discourage the BoE from beginning to cut rates sooner.” Market players anticipate an 80% rate cut from the BoE in May, but the likelihood of a rate cut from the Fed is now at 60% in March, down from 76.3% yesterday.
The daily GBP/USD chart shows a neutral to lower tendency, despite the possibility that Wednesday’s price action could complete a “bullish piercing” pattern, indicating further upward potential. However, since the most significant UK data is behind us, that may open the door for sellers to test the 200-day moving average and attack the 50-day moving average around 1.2599, below the 1.2600.
