British Inflation Hits 2-Year Low; Investors Bet on BoE Rate Cut

In November, British inflation recorded its lowest rate in over two years, dropping to 3.9% from October's 4.6%. Cheaper petrol, contributing to a decrease in transportation costs, played a role in this decline, and the headline Consumer Prices Index (CPI) inflation reading was below the 4.4% forecasted by economists in a Reuters poll. Core and services measures of inflation, closely monitored by the Bank of England (BoE), also experienced a downturn.

The unexpected drop in inflation prompted investors to increase bets on a BoE interest rate cut in the first half of the following year. The market fully priced in a rate cut by May 2024, with a nearly 50% chance of a cut by March. Consequently, the pound depreciated against the U.S. dollar, and British government bond yields fell. While Britain's inflation rate now aligns with that of France, it remains the highest among G7 advanced economies, with a 21% rise in consumer prices since 2020.

The Office for National Statistics (ONS) attributes the November inflation decline to lower fuel prices (10.6% lower than the previous year) and a smaller monthly increase in food and drink prices compared to the same period in 2022.

Separate data reveals a potential recession in Britain, with a 0.1% contraction in GDP in the third quarter. This economic downturn occurred shortly after Finance Minister Jeremy Hunt hinted at possible BoE interest rate cuts to stimulate growth.

Despite economic challenges, retail sales in November exceeded expectations, increasing by 1.3% from October. This boost, driven by Black Friday promotions, provides a more positive outlook.

The deteriorating budget picture for Prime Minister Rishi Sunak reveals a higher-than-expected public sector net borrowing of £116.4 billion in the fiscal year, £24.4 billion more than the same period the previous year. The government's fiscal headroom, a margin for tax cuts or spending increases, faces constraints. Slowing inflation could reduce the debt interest bill, potentially providing Sunak with additional fiscal space.

As businesses express growing pessimism about the economic outlook in December, with the Lloyds Bank Business Barometer showing the largest monthly decline in confidence in over a year, concerns about a slowdown persist. The Bank of England's recent downward revision of near-term output forecasts and continued adherence to a 5.25% interest rate contribute to a challenging economic landscape.

Internationally, the dollar index dropped and is set for its weakest performance since 2020 as investors await clues on potential Federal Reserve interest rate cuts. Analysts anticipate a slowdown in the U.S. economy in 2024, but the Fed is expected to balance this with measures to prevent a widening gap between the fed funds rate and realized inflation.

Recent data revealed U.S. prices dropping in November, pushing annual inflation below 3%. October's rising home prices signal ongoing housing market recovery. Mastercard reported a 3.1% increase in U.S. retail sales, lower than expected due to higher interest rates affecting consumer spending. Lower inflation in the U.S. could ease pressure on Britain's debt interest bill, potentially providing additional fiscal flexibility for tax cuts.

Data for Technical Analysis (5H) CFD GBP/USD

Resistance : 1.2731, 1.2734, 1.2740

Support : 1.2719, 1.2716, 1.2710    

5H Outlook

Source: Investing.com

Buy/Long 1 If the support at the price range 1.2709 - 1.2719 is touched, but the support at 1.2719 cannot be broken, the TP may be set around 1.2734 and the SL around 1.2704, or up to the risk appetite.

Buy/Long 2 If the resistance can be broken at the price range of 1.2731 - 1.2741, TP may be set around 1.2749 and SL around 1.2714, or up to the risk appetite.       

Sell/Short 1 If the resistance at the price range 1.2731 - 1.2741 is touched, but the resistance 1.2731 cannot be broken, the TP may be set around 1.2719 and the SL around 1.2746, or up to the risk appetite.

Sell/Short 2 If the support can be broken at the price range of 1.2709 - 1.2719, TP may be set around 1.2704 and SL around 1.2736, or up to the risk appetite.       

Pivot Points Dec 27, 2023 03:40AM GMT

Sources: Investing 1, Investing 2