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After investors digested the US Federal Reserve announcement yesterday, the GBP/USD pair is cautiously awaiting the Bank of England announcement today, Thursday. This is amid attempts to rebound higher with gains reaching 1.2792, recovering from losses that reached 1.2667.
According to forex trading platforms , the pound sterling is defending its position against the euro and the dollar despite inflation falling to its lowest level since 2021.
The pound sterling proved to be remarkably resilient after UK inflation figures came below expectations, putting the Bank of England on track to cut interest rates in the summer. As a result, the pound sterling exchange rate fell to 1.1684 against the euro in an initial reaction to news that UK consumer price inflation rose 3.4% in the 12 months to February 2024, down from 4.0% in January and below the consensus forecast of 3.6%. This is the weakest inflation reading since September 2021, when it was 3.1%. According to data from the economic calendar, the core consumer price index (excluding energy, food, alcohol, and tobacco) rose 4.5% in the 12 months to February 2024, down from 5.1% in January and below the forecast of 4.6%. Also, the services inflation rate – a key measure for the Bank of England – fell from 6.5% to 6.1%.
The initial sell-off in sterling was reversed very quickly, which is not the reaction we would expect when inflation figures are below the rate in this way. Commenting on the performance amid the data, Han Jo Ho, an economist at Lloyds Bank, said: "The UK inflation data, which came in slightly weaker than expected, led to some volatility in the initial reaction to sterling, which fell before recovering. Overall, sterling is slightly lower against the US dollar and the euro."
According to the Office for National Statistics, the largest downward contributions to the monthly change in UK inflation came from food and restaurants and cafes, while the largest upward contributions came from housing, household services and motor fuels. This data comes ahead of the Bank of England's policy announcement today, Thursday, which will see interest rates left unchanged at 5.25% and provide updated guidance on the outlook.
Meanwhile, this latest data could lead one of the Monetary Policy Committee members who voted to raise the interest rate in February to join the majority who prefer to keep interest rates unchanged. Also, we will be looking for another member to vote to cut interest rates alongside Swati Dhingra. This would be a slightly "dovish" signal that would be consistent with the bank's gradual shift towards cutting interest rates.
Inflation is expected to fall below 2.0% in April due to the sharp drop in energy prices, so markets are already positioning themselves for a downward trend in inflation. However, with services inflation remaining above 6.0% and core inflation well above the 2.0% target, the Bank of England is likely to remain patient. A rate hike in August is still the most likely date to start. This may explain why sterling has been remarkably resilient in the face of the below-consensus figures today.
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The pound was the second-best performer in 2023 and the best performer in 2024, largely due to the fact that interest rates have been set higher in the UK than anywhere else. The outlook for sterling and where it ultimately ends up in 2024 depends on whether the UK's interest rate advantage continues. According to analysts, "Our view that inflation will fall below 2% in April and then fall towards 1% suggests that the bank may have to start cutting interest rates in the summer and cut them to 3.00% next year instead of 4.00% as expected by investors."
This view implies a fundamental reassessment of interest rate expectations and confirms that the bank may have more room to cut rates than its peers“the US Federal Reserve is the exception”. Obviously, this poses a downside risk to the pound sterling over the coming months, all thanks to the expectation of a rapid decline in inflation Expectations and Analysis Today:
Based on the performance on the daily chart, the price of the GBP/USD pair is attempting to change its recent downward view. Obviously, this will occur in this timeframe if it moves towards the resistance levels of 1.2860 and the psychological resistance of 1.3000, respectively. Conversely, the key support level will remain important to confirm the downward shift. Today, the GBP/USD pair will be affected by the announcement of an update to the Bank of England's policy. Prior to that, readings of the Purchasing Managers' Index for the UK manufacturing and services sectors will be released. From the United States, the weekly jobless claims and readings of the Philadelphia Industrial Index and the Purchasing Managers' Index for the US manufacturing and services sectors will be announced.
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