Pound weaker after inflation data from the UK

The pound is weaker this morning. This is the result of inflation data for November. Consumer prices fell more than expected, which fueled speculation that interest rates could be cut by the Bank of England in the summer. GBP / USD exchange rate fell from 1,2725 and approached 1,2650.

Inflation falling in the UK

Inflation in the UK was much lower than expected in November, with markets now pricing in as much as 140 bp of interest rate cuts next year. Perhaps these market expectations have gone a bit too far, given Andrew Baily's recent hawkish stance.

Decline in the basic indicator below 4%. is a big surprise. Expectations indicated a ceiling of 4,4%. The base rate was 5,1 percent. on an annual basis. Also in this case, the forecasts indicated a higher value (5,6%). There is a visible drop in prices in most categories.

The Bank of England will certainly be pleased with less price pressure in services. Here, inflation dropped to 6,3%. after reaching a peak of 7,4 percent. in summer. It is true that last week the institution argued that this downward trend is not fully related to economic factors - which suggests that part of this movement is just statistical noise.

A turn in monetary policy

Despite today's surprise, inflation in services at the beginning of next year should still fluctuate around 6%. At first glance, this would justify a more cautious approach Bank of England at last week's meeting. BoE accepted a definitely different line than the Federal Reserve and sounded more hawkish, while the American institution has signaled a turn in policy and rate cuts in the first half of the year are now quite probable. However, the BoE will probably remain much more cautious, which may support GBP in relation to USD.

Despite today's declines in the GBP/USD rate, the quotations are still moving within the upward channel that has been in place since the end of October. The increases have recently accelerated after the decision of the Fed and then the BoE. The local peak close to 1,28 is currently the key technical resistance. Support at the moment seems to be the lower band of the mentioned channel.

Source: OANDA TMS Brokers