Pound Sterling slumps on soft UK inflation data, dismal market sentiment

• Pound Sterling drops sharply as UK headline inflation deflates significantly in January.
• Soft UK CPI data has propelled BoE’s rate-cut bets.
• Stubborn US inflation data has pushed back Fed rate-cut hopes.

The Pound Sterling (GBP) faces an intense sell-off in Wednesday’s early European session as the United Kingdom Office for National Statistics (ONS) has reported softer-than-anticipated inflation data for January. Annual headline and core Consumer Price Index (CPI) rose steadily by 4.0% and 5.1%, respectively, while the monthly headline figure deflated significantly by 0.6%.

Surprisingly soft inflation report and a moderate growth in Average Earnings are expected to allow Bank of England (BoE) policymakers to consider early rate cuts than market participants had anticipated earlier.

Last week, BoE Deputy Governor Sarah Breeden said rate cuts will be based on how inflation and wage growth will evolve. The Pound Sterling tends to face foreign flows if expectations for BoE’s dovish bets escalate.

The GBP/USD pair is expected to remain in the negative trajectory due to softening consumer price inflation and dismal market sentiment. The broader appeal for safe-haven assets improves as sticky United States inflation data push back expectations for a rate-cut decision by the Federal Reserve (Fed) in the May monetary policy meeting. Fed policymakers lack evidence to build confidence over inflation declining sustainably towards the 2% target. This has boosted the US Dollar as a hawkish narrative by the Fed tends to attract more foreign inflows.

Daily Digest Market Movers: Pound Sterling falls vertically while US Dollar consolidates

• Pound Sterling resumes its downside journey as the United Kingdom ONS has reported a soft inflation report for January.
• The annual headline and core inflation grew steadily at 4.0% and 5.1%, respectively. However, investors anticipated that the headline and core CPI had accelerated to 4.2% and 5.1%, respectively.
• The monthly headline inflation deflated at a robust pace of 0.6% against the consensus of 0.3%. In December, the economic data was expanded by 0.4%.
• A sharp decline in monthly inflation data is expected to prompt expectations of early rate cuts by the Bank of England.
• A soft inflation report has neutralized decent labor demand and moderate growth in Average Earnings data for three months ending December, released on Tuesday.
• The Unemployment Rate fell sharply to 3.8% from the consensus of 4.0% and the former release of 4.2%.
• Annual Earnings including bonuses grew by the smallest pace of 5.8% since three months ending July 2022, while investors projected a slower wage growth of 5.6%.
• On Tuesday, the GBP/USD pair witnessed an intense sell-off after the United States Bureau of Labor Statistics (BLS) released a stubborn inflation report for January.
• The US core inflation that strips off volatile food and oil prices rose steadily by 3.9%, while investors anticipated a decline to 3.7%.
• Persistent price pressures cooled down expectations of Federal Reserve rate cuts in May.
• The US Dollar Index (DXY) remains subdued in the Asian session but more upside remains favored due to dismal market mood.

Technical Analysis: Pound Sterling declines towards 200-DEMA

Pound Sterling falls back vertically after failing to sustain above the round-level resistance of 1.2600. The near-term outlook of the GBP/USD pair has turned bearish as it has dropped below the 20, 50 and 100-day Exponential Moving Averages (EMAs). The Cable is declining towards the 200-day EMA, which trades around 1.2510.

The 14-period Relative Strength Index (RSI) has dropped to 40.00. A slippage below the same would trigger a bearish momentum.