Sterling Faces Weekly Decline as Low Inflation Fuels Rate Cut Expectations

Sterling briefly climbed back above $1.30 but is on track for a weekly decline, driven by unexpectedly low UK inflation, which has raised expectations for two interest rate cuts by the Bank of England (BoE) before year-end.

The UK economy grew by 0.2% in August after two months of stagnation, providing some relief to Chancellor Rachel Reeves before Labour’s first budget later this month. All major sectors grew, though slower-than-expected service growth was balanced by manufacturing and construction rebounds. The BoE is predicted to cut rates by a quarter-point in November, following a rate cut in August.

Prime Minister Keir Starmer, aiming for 2.5% annual growth, plans to host an international investment summit to attract foreign capital. The UK's post-pandemic recovery has been slower compared to other G7 nations, with the economy now 3.4% larger than its pre-pandemic size in February 2020.

The UK labor market showed signs of cooling, with pay growth at its lowest in almost four years and job placements continuing a two-year decline, though at a slower pace. This easing could support the case for further rate cuts by the BoE. However, there is uncertainty around economic policy ahead of Reeves' October 30 budget, where she may need to raise taxes by £20 billion to avoid cuts in public services.

The Resolution Foundation suggested revising fiscal rules to enable more long-term investment, while the Institute for Fiscal Studies estimates a need for £25 billion in tax hikes to prevent public service cuts. Business confidence dipped, with tax concerns overshadowing investment, and businesses expressing anxiety over the upcoming budget and global conflicts.

The UK housing market showed signs of recovery, with rising house prices and sales. However, pressure in the rental market persists, as demand outpaces supply.

The U.S. dollar is set for its third consecutive weekly gain, bolstered by a dovish European Central Bank and strong U.S. economic data, which is delaying expectations for U.S. rate cuts, particularly if Donald Trump wins the presidency.

U.S. retail sales in September exceeded forecasts, growing by 0.4%, signaling consumer strength that could influence the Federal Reserve’s upcoming interest rate decisions. Spending was robust on essentials like groceries and clothing, despite weakness in big-ticket items such as furniture and electronics.

U.S. business inventories also rose in August, supported by retailer stock increases, and homebuilder confidence improved in October, despite challenges from high mortgage rates and affordability issues. Mortgage rates recently spiked, reaching 6.32%, reversing a decline that had started ahead of anticipated rate cuts.

Meanwhile, unemployment claims unexpectedly dropped last week by 19,000 to 241,000, although the recent hurricanes, Helene and Milton, are expected to cloud the labor market in the near term. Economists had predicted 260,000 new claims, but hurricane disruptions continue to affect economic data. As a result, the GBP/USD pair is likely to continue trading within its current range, possibly drifting slightly lower during this time.

Data for Technical Analysis (1H) CFD GBP/USD

Resistance : 1.3026, 1.3028, 1.3032

Support : 1.3018, 1.3016, 1.3012

1H Outlook

Source: TradingView

Buy/Long 1 If the support at the price range 1.3010 - 1.3018 is touched, but the support at 1.3018 cannot be broken, the TP may be set around 1.3027 and the SL around 1.3006, or up to the risk appetite.

Buy/Long 2 If the resistance can be broken at the price range of 1.3026 - 1.3034, TP may be set around 1.3038 and SL around 1.3014, or up to the risk appetite.       

Sell/Short 1 If the resistance at the price range 1.3026 - 1.3034 is touched, but the resistance 1.3026 cannot be broken, the TP may be set around 1.3018 and the SL around 1.3038, or up to the risk appetite.

Sell/Short 2 If the support can be broken at the price range of 1.3010 - 1.3018, TP may be set around 1.3000 and SL around 1.3030, or up to the risk appetite.       

Pivot Points Oct 18, 2024 03:14AM GMT

Sources: Investing 1, Investing 2