Expected UK Interest Rate Cut Postponed; GBP/USD Stability Anticipated

In recent days, the first forecasted interest rate cut in the UK has been postponed, with the May 9th meeting now considered the first opportunity for the Bank of England (BoE) to initiate monetary policy easing. Contrary to the initial enthusiasm for five quarter-point reductions at the end of the previous year, financial markets are currently pricing in a total of 116 basis points of cuts in 2024.

However, concerns about the UK economy persist as British retailers reported lackluster Christmas sales. According to the British Retail Consortium (BRC), spending in cash terms in December was 1.7% higher than the previous year, indicating a decline in purchases when adjusted for inflation. High inflation and the BoE's interest rate hike to 5.25% in response to rising prices have posed challenges for British shoppers. Despite a decrease in consumer price inflation from 10.1% in January to 3.9% in November, wages lagged behind prices for most of 2023, leading to a 0.1% contraction in the economy in the third quarter.

Throughout 2023, retail spending rose by 3.6%, primarily driven by an 8.1% increase in spending on food. In contrast, non-food spending experienced a 0.1% decline for the year, with a 1.5% drop in the final three months of 2023. Retailers' Christmas trading reports have been mixed, with robust outcomes reported by some, including clothing chain Next and discount supermarkets Aldi UK and Lidl GB, while sportswear group JD Sports Fashion issued a warning on annual profit.

Official retail sales data, covering more stores than the BRC, indicated a 5.7% annual rise in non-fuel spending for November. Separate figures from Barclays revealed weaker spending growth in December, attributed in part to lower inflation. Spending at petrol stations and supermarkets declined or slowed in December, reflecting lower fuel prices and promotional activities in November. However, spending in pubs, bars, and clubs showed a notable increase.

In the labor market, British employers increased pay and exhibited a renewed interest in hiring in December, as revealed by the Recruitment and Employment Confederation (REC) survey. Permanent worker hiring continued to contract, though less severely than in November, while temporary hiring also decreased at a reduced rate. Pay for new hires in both permanent and temporary roles grew more quickly in December compared to November, although the increase for permanent staff was the second weakest since March 2021.

The Bank of England, having raised its benchmark interest rate to 5.25% in August, is closely monitoring inflation pressure in the labor market. Official data indicates an annual growth rate of just over 7% in pay for the three months ending in October. While the BoE is expected to maintain interest rates on February 1, investors anticipate five rate cuts throughout 2024.

On the global stage, the dollar strengthened on Tuesday as traders awaited Thursday's inflation data, seeking clues on the Federal Reserve's potential rate cuts. The dollar index, which hit a five-month low in December, has rebounded this year. The consumer price inflation report for December, expected to show a 0.2% monthly rise and a 3.2% annual increase, will be a crucial factor influencing Fed expectations. Fed funds futures suggest a 64% probability of a March rate cut, down from 70% a week ago. Tuesday's data revealing a narrowing US trade deficit in November hinted at slowing domestic demand, potentially impacting economic growth in the fourth quarter. Hence, there is an anticipation that the GBP/USD currency pair will likely maintain a relatively tight range before the inflation data is unveiled. The projection is for a dollar strengthening trend due to a more noticeable economic deceleration in England compared to the United States.

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

Resistance : 1.2716, 1.2720, 1.2727

Support : 1.2704, 1.2700, 1.2693    

5H Outlook

Source: Investing.com

Buy/Long 1 If the support at the price range 1.2694 - 1.2704 is touched, but the support at 1.2704 cannot be broken, the TP may be set around 1.2719 and the SL around 1.2689, or up to the risk appetite.

Buy/Long 2 If the resistance can be broken at the price range of 1.2716 - 1.2726, TP may be set around 1.2735 and SL around 1.2699, or up to the risk appetite.       

Sell/Short 1 If the resistance at the price range 1.2716 - 1.2726 is touched, but the resistance 1.2716 cannot be broken, the TP may be set around 1.2702 and the SL around 1.2731, or up to the risk appetite.

Sell/Short 2 If the support can be broken at the price range of 1.2694 - 1.2704, TP may be set around 1.2685 and SL around 1.2721, or up to the risk appetite.       

Pivot Points Jan 10, 2024 02:27AM GMT

Sources: Investing 1, Investing 2