Sterling Drops Sharply as U.S. Dollar Strengthens, Fed's Cautious Rate Cuts Expected

Sterling slid further this week, marking its sharpest weekly loss since early 2023 due to a strengthened U.S. dollar after Donald Trump’s election victory. This currency weakness reflects investor concerns as U.S. economic resilience overshadows UK developments. While investors are following UK financial news, including Chancellor Rachel Reeves' Mansion House speech promoting ambitious "megafunds" of £80 billion to rejuvenate British pensions, the broader sentiment leans heavily toward U.S. market movements.

Catherine Mann of the Bank of England warned that the UK’s inflation remains stubborn, with a risk of overshooting due to factors like wage pressures, energy prices, and service costs. The BoE’s recent revisions suggest inflation could peak at 2.5% by year-end and remain above its 2% target until 2027, underscoring a shift to a prolonged, gradual rate-cutting approach.

However, UK wage growth also exhibited signs of softening. Excluding bonuses, average wages rose 4.8% in the third quarter, down from prior months but aligned with the BoE's forecast. This wage cooling, coupled with rising unemployment (now at 4.3%) and falling job vacancies, hints at a loosening labor market. However, the budget’s added costs—through social security hikes and fiscal measures—will likely contribute to inflation in the coming years, complicating the BoE’s strategy to tame price pressures without stifling growth.

Consumer spending trends show shoppers are cautious ahead of Black Friday and Christmas, with grocery inflation affecting their purchasing power. Public-sector pay expectations have surpassed those in the private sector, driven by government-approved increases funded by higher taxes on employers, a shift likely to influence inflationary trends in the near term.

The UK housing market, meanwhile, is experiencing slower growth, with prices at record highs but rising more modestly. Higher interest rates and newly imposed home-buying taxes have dampened demand, potentially creating a sustained cooling effect. Halifax's report indicates that while house prices have largely leveled off since mid-2022, the potential for slower rate cuts could constrain housing affordability and buying activity, particularly as consumer confidence remains fragile amidst rising costs and a challenging fiscal environment.

The dollar is set for its strongest weekly performance in over a month, fueled by expectations of fewer Federal Reserve rate cuts and anticipation that Donald Trump’s policies, especially trade tariffs and reduced immigration, could drive up inflation when he takes office.

October’s inflation data shows a slight increase, with the Consumer Price Index (CPI) rising 2.6% year-over-year, influenced by higher producer prices and a resilient labor market. U.S. unemployment claims fell last week, underscoring the labor market’s strength and supporting a more cautious approach from the Fed on monetary policy. Combined with stronger short-term Treasury yields, these factors suggest the Fed may implement fewer rate cuts through 2025 than initially expected.

Fed Chair Jerome Powell, speaking Thursday, emphasized the Fed's cautious approach to rate cuts, citing strong economic fundamentals, a robust job market, and inflation above the target rate. He remarked that the central bank must balance its rate cuts carefully to avoid moving too quickly or too slowly, as either approach could impact economic stability.

Data for Technical Analysis (30Min) CFD GBP/USD

Resistance : 1.2677, 1.2678, 1.2681

Support : 1.2671, 1.2670, 1.2667

30Min Outlook

Source: TradingView 

Buy/Long 1 If the support at the price range 1.2665 - 1.2671 is touched, but the support at 1.2671 cannot be broken, the TP may be set around 1.2678 and the SL around 1.2662, or up to the risk appetite.

Buy/Long 2 If the resistance can be broken at the price range of 1.2677 - 1.2683, TP may be set around 1.2692 and SL around 1.2668, or up to the risk appetite.       

Sell/Short 1 If the resistance at the price range 1.2677 - 1.2683 is touched, but the resistance 1.2677 cannot be broken, the TP may be set around 1.2671 and the SL around 1.2686, or up to the risk appetite.

Sell/Short 2 If the support can be broken at the price range of 1.2665 - 1.2671, TP may be set around 1.2658 and SL around 1.2680, or up to the risk appetite.       

Pivot Points Nov 15, 2024 02:54AM GMT