Summary:
The Pound Sterling is facing downward pressure after disappointing UK economic data revealed slower-than-expected GDP growth and a contraction in factory activity in November. This has fueled expectations that the Bank of England (BoE) will be more aggressive in lowering interest rates at its upcoming February meeting. Investors are now turning their attention to US economic data releases for further insights into global market trends.
UK Economic Data Disappoints:
The UK economy showed signs of growth in November, but the pace was weaker than anticipated. The Gross Domestic Product (GDP) increased by only 0.1%, falling short of economists’ expectations of a 0.2% rise. This followed a similar contraction in October. Further adding to the concern, both manufacturing and industrial production also declined in November, indicating a broad slowdown in the UK’s industrial sector. These figures have raised concerns about the overall strength of the UK economy.
Factory Activity Concerns:
The persistent weakness in UK factory activity suggests that producers are struggling due to concerns about sluggish demand. The possibility of new import tariffs being imposed by the US also weighs on the outlook. This uncertainty has led some to believe that manufacturers are operating below full capacity.
Dovish Expectations for Bank of England:
However, the potential for more aggressive monetary easing from the BoE is offering some hope. Following recent data showing a slowdown in inflation (Consumer Price Index or CPI), traders are now pricing in a higher likelihood of an interest rate cut at the BoE’s February meeting. Currently, markets are predicting an 84% chance of a 0.25 percentage point (25 basis points) rate cut, bringing the rate down to 4.5%. This change in sentiment has also resulted in a pause in the recent rally in UK government bond (gilt) yields, providing some relief to Chancellor of the Exchequer.
Pound Sterling’s Reaction:
The Pound Sterling has reacted negatively to the weak UK data, falling to around 1.2200 against the US Dollar (USD). This drop is a result of both the disappointing economic figures and the anticipation of a more dovish stance from the Bank of England.
US Dollar and Federal Reserve:
While the Pound is weakening, the US Dollar is consolidating. Traders are re-evaluating expectations for the Federal Reserve’s (Fed) likely interest rate policy for the rest of the year. The release of US inflation data on Wednesday indicated that the downward trend in prices remains intact, impacting previous predictions for the Fed’s actions.
The market is now expecting the Fed to cut interest rates more than once this year, with the first cut likely to occur in June. Previously, the expectation was for only one interest rate cut in September.
Upcoming US Data:
Traders are now closely watching US Initial Jobless Claims and Retail Sales data for December, due to be released at 13:30 GMT. These figures will provide further insights into the health of the US economy and likely influence market sentiment regarding interest rate decisions by the Federal Reserve.
Technical Analysis:
The Pound Sterling is currently under pressure around the 1.2200 level against the US Dollar. Technical indicators suggest a bearish trend, with the 20-day Exponential Moving Average (EMA) pointing downward. While the 14-day Relative Strength Index (RSI) has bounced slightly, it remains in oversold territory. Support is expected to be found near the October 2023 low of 1.2050. On the upside, the 20-day EMA will act as key resistance.
Key Takeaways:
- The Pound Sterling is weakening due to poor UK economic data and expectations of interest rate cuts by the Bank of England.
- UK GDP growth was slower than expected, and factory activity contracted in November.
- Markets anticipate a significant chance of an interest rate cut by the BoE in February.
- Traders are also reassessing expectations for the Federal Reserve’s interest rate policy.
- Investors are now focusing on upcoming US economic data releases for further market direction.
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