Pound Sterling turns subdued as focus shifts to UK Retail Sales data

  • Pound Sterling faces pressure near 1.2700 despite hopes of an early rate cut by the BoE have waned.
  • UK Inflation remains stubbornly high due to higher fuel costs and seasonal airfare prices.
  • Investors await the UK Retail Sales data for further guidance.

The Pound Sterling (GBP) grinds between risk-off market mood and stubbornly high UK Consumer Price Index (CPI) data for December. High UK inflation data has pushed back expectations of early rate cuts by the Bank of England (BoE). The GBP/USD pair is expected to witness more upside as investors hope that the Federal Reserve (Fed) will start reducing interest rates earlier than the BoE. 

BoE policymakers are expected to remain on their toes as the UK economic outlook is vulnerable and price pressures are significantly stubborn. Going forward, the Pound Sterling will be guided by the Retail Sales data for December, which is set to be released on Friday. Upbeat consumer spending data would further diminish hopes of an early rate cut by the BoE.

Daily Digest Market Movers: Pound Sterling falls back as market mood turns downbeat

  • Pound Sterling recovery stalls after climbing to near the round-number-level resistance of 1.2700.
  • The broader appeal has not been impacted as investors see no early discussions from Bank of England policymakers about interest rate cuts. This comes after consumer price inflation in the United Kingdom economy remained stubbornly higher in December. 
  • The UK inflation remained surprisingly sticky, prompted by higher fuel prices, a slight rise in service inflation and an increase in seasonal airfares.
  • Annual headline inflation grew strongly by 4.0% against 3.9% increase in November while market participants projected a deceleration to 3.8%. 
  • In the same period, the core inflation – that strips out volatile food and Oil prices – remained sticky at 5.1%. Investors had anticipated 4.9%.
  • The consumer price inflation remains higher despite the BoE maintaining interest rates at elevated levels. This is expected to discourage BoE policymakers from endorsing interest rate cuts in the near-term.
  • Investors should note that the economic outlook of the UK economy is vulnerable and fears of a technical recession are high. 
  • As per the revised estimate from the UK Office for National Statistics (ONS), the British economy shrank by 0.1% in the third quarter of 2023 and is not expected to deliver any sort of growth in the final quarter of 2024.
  • It would be challenging for BoE policymakers to decide on whether to adopt a dovish approach to avoid a technical recession or maintain a restrictive monetary policy stance.
  • Going forward, market participants will focus on UK Retail Sales for December, which will be published on Friday.
  • Monthly Retail Sales will have contracted by 0.5% after increasing at a robust pace of 1.3% in November, as per estimates. Annual consumer spending is to have risen by 1.1% against a slight increase of 0.1% in November.
  • Investors anticipate that annual Retail Sales excluding fuel prices grew by 1.3% versus. former reading of 0.3%.
  • Meanwhile, the US Dollar Index (DXY) has rebounded to near 103.60 as investors' risk-appetiet is easing. The USD Index is expected to continue its upside journey as trades pare bets supporting a rate cut from the Federal Reserve (Fed) in March. 
  • Going forward, action in the FX domain will be guided by guidance from Federal Reserve policymakers on interest rates. Fed policymakers are consistently endorsing a restrictive interest rate stance amid lack of confidence among investors that inflation will progressively return to the 2% target in a sustainable manner.

Technical Analysis: Pound Sterling faces pressure around 1.2700

Pound Sterling has delivered a sharp recovery to near 1.2700 after discovering strong buying interest around a fresh monthly low of 1.2600. The GBP/USD pair recovered sharply after testing the 50-day Exponential Moving Average (EMA), which oscillates around 1.2620. However, the Cable is struggling to shift auction above the 20-day EMA, which trades around 1.2700. 

The 14-period Relative Strength Index (RSI) has shifted into the 40.00-60.00 range, which indicates a listless performance.

Interest rates FAQs

What are interest rates?

Interest rates are charged by financial institutions on loans to borrowers and are paid as interest to savers and depositors. They are influenced by base lending rates, which are set by central banks in response to changes in the economy. Central banks normally have a mandate to ensure price stability, which in most cases means targeting a core inflation rate of around 2%.
If inflation falls below target the central bank may cut base lending rates, with a view to stimulating lending and boosting the economy. If inflation rises substantially above 2% it normally results in the central bank raising base lending rates in an attempt to lower inflation.

How do interest rates impact currencies?

Higher interest rates generally help strengthen a country’s currency as they make it a more attractive place for global investors to park their money.

How do interest rates influence the price of Gold?

Higher interest rates overall weigh on the price of Gold because they increase the opportunity cost of holding Gold instead of investing in an interest-bearing asset or placing cash in the bank.
If interest rates are high that usually pushes up the price of the US Dollar (USD), and since Gold is priced in Dollars, this has the effect of lowering the price of Gold.

What is the Fed Funds rate?

The Fed funds rate is the overnight rate at which US banks lend to each other. It is the oft-quoted headline rate set by the Federal Reserve at its FOMC meetings. It is set as a range, for example 4.75%-5.00%, though the upper limit (in that case 5.00%) is the quoted figure.
Market expectations for future Fed funds rate are tracked by the CME FedWatch tool, which shapes how many financial markets behave in anticipation of future Federal Reserve monetary policy decisions.

Share: Feed news

Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers. The author will not be held responsible for information that is found at the end of links posted on this page.

If not otherwise explicitly mentioned in the body of the article, at the time of writing, the author has no position in any stock mentioned in this article and no business relationship with any company mentioned. The author has not received compensation for writing this article, other than from FXStreet.

FXStreet and the author do not provide personalized recommendations. The author makes no representations as to the accuracy, completeness, or suitability of this information. FXStreet and the author will not be liable for any errors, omissions or any losses, injuries or damages arising from this information and its display or use. Errors and omissions excepted.

The author and FXStreet are not registered investment advisors and nothing in this article is intended to be investment advice.

Recommended content

Recommended content

Editors’ Picks

EUR/USD clings to recovery gains near 1.0650

EUR/USD clings to recovery gains near 1.0650

EUR/USD trades in positive territory near 1.0650 on Wednesday. The US Dollar sees a modest retreat, helping the pair recover previous losses. The EUR/USD rebound, however, appears limited amid Fed-ECB policy divergence. ECB and Fed speeches eyed. 


GBP/USD holds above 1.2450 after UK inflation data

GBP/USD holds above 1.2450 after UK inflation data

GBP/USD is holding onto the latest upside above 1.2450 in the European session on Wednesday. The UK's ONS reported that the annual inflation edged lower to 3.2% in March. This reading beat the market expectation of 3.1% and helped Pound Sterling stay afloat.


Gold fluctuates near $2,390 as markets keep an eye on geopolitics

Gold fluctuates near $2,390 as markets keep an eye on geopolitics

Gold trades in a relatively tight range near $2,390 in the second half of the day on Wednesday. In the absence of high-tier data releases, investors keep a close eye on headlines surrounding Iran-Israel conflict.

Gold News

XRP tests $0.50 resistance after Ripple CLO clarifies that no pretrial conference took place with SEC

XRP tests $0.50 resistance after Ripple CLO clarifies that no pretrial conference took place with SEC

XRP is stuck below $0.50 resistance after failing to close above this level since Monday. Ripple CLO Stuart Alderoty said late Tuesday there was no pretrial conference since the SEC dropped charges against executives. 

Read more

World economy: To cut or not to cut (simultaneously)?

World economy: To cut or not to cut (simultaneously)?

US inflation March figure, again higher than expected, put an end to the scenario of a simultaneous first rate cut by the Fed, the ECB, and the BoE in June. 

Read more