Pound Sterling tumbles on soft UK inflation data

• Pound Sterling drops sharply as UK inflation softened sharply in November.
• UK’s monthly headline inflation surprisingly contracted by 0.2%.
• Investors may raise bets in favour of early rate cuts by the BoE.

The Pound Sterling (GBP) fell sharply after the United Kingdom’s Office for National Statistics (ONS) reported a significant decline in inflation in November. The GBP/USD pair has been heavily dumped as a more-than-anticipated decline in the UK Consumer Price Index (CPI) increase bets for early interest-rate cuts by the Bank of England (BoE).

While UK inflation has declined more than expected in November, BoE policymakers are expected to hold a stance for keeping interest rates higher for longer. Price pressures in the UK are still the highest in comparison with other developed economies, which would force BoE policymakers to call for rate cuts later than other major central bankers.

Daily Digest Market Movers: Pound Sterling falls vertically on soft inflation data

• Pound Sterling faces an intense sell-off as the ONS has released a softer-than-anticipated inflation report for November.
• Monthly headline inflation contracted by 0.2% in November, against expectations of 0.1% increase. Annual headline inflation grew at a slower pace of 3.9% against expectations of 4.4%. Headline inflation has grown by 4.6% in October.
• The annual core inflation, which excludes volatile food and energy prices, softened to 5.1% versus the consensus of 5.6% and the former reading of 5.7%.
• Monthly Producer Price Index (PPI) for input and output have contracted 0.3% and 0.1%, respectively, less than what markets expected.
• This indicates prices of goods at factory gates fell, likely due to a decline in domestic and external demand.
• Despite the soft inflation report, the Bank of England is expected to keep interest rates restrictive for a more extended period.
• BoE Deputy Governor Sarah Breeden emphasized keeping the policy restrictive to keep price pressures in check.
• While asked about guidance on interest rates, Breeden said "I have no pre-determined policy path in mind."
• On Monday, BoE Deputy Governor Ben Broadbent also stressed keeping interest rates higher for a longer period. Broadbent highlighted the need for more evidence to confirm that inflation is in a clear downtrend.
• Later this week, investors will focus on November's UK Retail Sales data. According to the estimates, this measure of consumer spending grew by 0.4% on a monthly basis, against a 0.3% decline in October.
• Meanwhile, the US Dollar Index (DXY) turns sideways near 102.00 after a slight decline on increasing rate cut expectations by the Federal Reserve (Fed).
• The DXY US Dollar Index failed to find a firm footing despite Atlanta Federal Reserve President Raphael Bostic criticizing any urgency of interest rate cuts. Bostic added that the central bank must ensure that inflation returns to 2% given that the economy is resilient.
• This week, investors will focus on the US core Personal Consumption Expenditure price index (PCE) data, which will be published on Friday.
• Per the preliminary consensus, monthly core PCE is expected to grow at a steady pace of 0.2%. The annual core PCE is seen softening to 3.3% against the former reading of 3.5%.

Technical Analysis: Pound Sterling corrects to near 1.2660

Pound Sterling surrenders its entire gains generated on Tuesday after the release of the softer-than-projected UK inflation data for November. The GBP/USD pair trades inside Tuesday’s range but is expected to extend its correction towards the 20-period Exponential Moving Average (EMA), around 1.2600.

The Relative Strength Index (RSI) (14) trades inside the 40.00-60.00 range, which suggests a consolidation ahead.