Pound Sterling recovers quickly as BoE rate cut bets wane after stubborn inflation data

• Pound Sterling has discovered strong buying interest as the UK inflation turned out highly stubborn.
• Higher fuel prices and service price index boosted UK consumer price inflation.
• The market mood remains downbeat as investors are uncertain about Fed rate cuts.

The Pound Sterling (GBP) delivers a stalwart recovery after the release of the surprisingly stubborn United Kingdom consumer price inflation data for December. The GBP/USD pair recovers their entire losses as hopes of an early rate cut by the Bank of England (BoE) have waned amid higher price pressures. The Consumer Price Index (CPI) in the UK economy remained stubborn amid significant rise in oil prices due to Russia-Ukraine war and slightly higher service inflation.

A sticky UK inflation report has provided more room to the BoE policymakers to maintain interest rates higher at 5.25% for a longer period. BoE policymakers have been warning from long that it is too early to discuss about the unwinding of higher interest rates as price pressures are far above the required rate of 2%.

Meanwhile, a sharp recovery in the Pound Sterling could stall as the market mood is quite cautious. The market sentiment has turned downbeat as investors are uncertain about when the Federal Reserve (Fed) will start the rate-cut campaign. Going forward, market participants will keenly focus on the United States Retail Sales data for December, which will be published at 13:30 GMT.

Daily Digest Market Movers: Pound Sterling rises on sticky UK Inflation report

• Pound Sterling delivers a V-shape recovery as the United Kingdom inflation data for December has turned out stubbornly higher while investors anticipated to remain soft.
• The UK ONS has reported that monthly headline inflation grew at a stronger pace of 0.4% against expectations of 0.2%. In November, headline price pressures were contracted by 0.2%.
• The annual headline inflation rose by 4.0% against 3.9% growth in November. Market participants anticipated a deceleration to 3.8%.
• Core consumer price inflation that excludes volatile food and oil prices remained sticky at 5.1% while investors projected it softening to 4.9%.
• A sharp increase in price pressures has indicated that the last leg of high inflation is expected to be a challenging task for Bank of England policymakers.
• This will offer a strong argument to BoE policymakers to maintain a restrictive monetary policy stance for a longer period.
• Traders are expected to pare higher bets supporting an early rate cut from the BoE, which were boosted by a sharp decline in wage growth data, released on Tuesday.
• The Pound Sterling witnessed a sharp sell-off in Tuesday’s session on slower wage growth and dismal market mood.
• While labor demand remained steady, UK employers slashes wage growth due to vulnerable demand conditions in the domestic and the overseas market.
• The market mood remains downbeat as traders pare bets in favour of rate cuts by the Federal Reserve from March after the hawkish commentary from Governor Christopher Waller.
• Christopher Waller said the Fed should not rush to reduce interest rates until it get confident that inflation will return to the 2% target in a sustainable manner.
• The US Dollar Index (DXY) has printed a fresh monthly high above 103.50 as investors’ confident for Fed rate cut in March is fading.
• Going forward, the USD Index will be guided by the United States Retail Sales and the Industrial Production data for December.
• As per the estimates, monthly Retail Sales grew at a pace of 0.4% against 0.3% in November. The Industrial Production remained stagnant against 0.2% growth.

Technical Analysis: Pound Sterling recovers from 50-DEMA

Pound Sterling delivers a swift recovery after discovering strong buying interest near the round-level support of 1.2600. The GBP/USD pair has rebounded after testing the 50-day Exponential Moving Average (EMA), which trades around 1.2600. The near-term demand for the Cable would improve if it manages to climb above the 20-day EMA, which oscillates around 1.2690.

The GBP/USD pair manages to hold auction above the 50% Fibonacci retracement at 1.2590 (of the move from 13 July 2023 high at 1.3142 to 4 October 2023 low at 1.2037). The 14-period Relative Strength Index (RSI) oscillates in the 40.00-60.00, which indicates a listless performance.