This is a guest post by Rania Gule, Market Analyst at XS.com.
GBP/USD opened Thursday at 1.2634, below the 1.2680 level, after the UK Consumer Price Index fell short of expectations. This caused the pound sterling to fall against the US dollar.
The pound had the weakest performance of the major currencies yesterday, falling by around 0.5 percent to settle just below 1.2680 after a weak rebound from the day’s lows. Consumer Price Index readings showed UK inflation fell significantly in November, with monthly inflation at 0.0% compared to market expectations of 0.1%, in contrast to October’s flat 0.0%. It unexpectedly fell to -0.2%.
The increase in the number of existing US home sales in November is thought to have increased the market’s risk appetite, causing the dollar to fall again. This halted the daily decline in GBP/USD during trading on Thursday.
Additionally, improving U.S. consumer confidence indicates cautious optimism about economic expectations in December, with the Consumer Economic Expectations Index rising slightly to 110.7 from 101.0 in November. .
In my view, the sharp fall in UK inflation was driven by falling prices across all sectors of the economy. As a result, the Bank of England could consider cutting rates just a week after suspending rate hikes. The Fed and ECB could follow suit and ease monetary policy, ending what could be the deepest global economic downturn since the 2008 financial crisis.
So will the weak inflation report change the Bank of England’s stance? I think falling inflation should put pressure on central banks to cut interest rates next year. However, with the core consumer price index at 5.1%, far short of the central bank’s 2% target, I don’t think it’s the right time to cut interest rates right away.
It will be important to see how Bank of England officials react to the inflation report and whether they become less hawkish as a result. This will help determine the overall direction of the GBP/USD pair in the medium to long term.
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