Future of GBP/USD Post UK Inflation Decline

This is a guest post by Rania Gule, Market Analyst at XS.com

The GBP/USD pair dropped below the 1.2680 level, starting Thursday’s trading at 1.2634, following a lower-than-expected reading of the UK Consumer Price Index. This led to a decline in the British Pound against the US Dollar.

Sterling had the weakest performance among major currencies yesterday, losing about half a percent after a weak rebound from its daily lows, settling just below 1.2680. The Consumer Price Index reading showed a significant decrease in UK inflation in November, with monthly inflation unexpectedly dropping to -0.2%, compared to market expectations of 0.1%, in contrast to October’s flat reading of 0.0%.

The increase in existing home sales in the United States in November is believed to have helped boost risk appetite in the market, pushing the US Dollar lower again. This, in turn, halted the daily decline in the GBP/USD pair during Thursday’s trading.

Additionally, improved US consumer confidence indicates cautious optimism about economic expectations in December, with the Consumer Economic Expectations Index rising to 110.7 from 101.0 in November, albeit with a slight decrease.

In my view, the sharp decline in UK inflation was driven by falling prices across all sectors of the economy. This could prompt the Bank of England to consider lowering interest rates, just one week after temporarily halting rate hikes. The Fed and the ECB may follow suit in easing monetary policy, potentially ending a global economic downturn that could be the most severe since the 2008 crisis.

So, will the weak inflation report change the Bank of England’s stance? I believe the drop in inflation should put pressure on the central bank to lower interest rates in the coming year. However, with the core Consumer Price Index stands at 5.1%, far from the bank’s 2% target, I don’t think it’s the right time to cut interest rates soon.

It’s crucial to observe how the Bank of England officials react to the inflation report and whether they adopt a less hawkish stance as a result. This will help determine the overall direction of the GBP/USD pair in the medium and long term.

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