Pound Surges, BoE Faces Inflation Dilemma

The British pound experienced a significant surge earlier this week, reaching a two-month high against the weakening US dollar, propelled by a softer-than-expected US inflation report.

The Bank of England reported a substantial drop in UK inflation to 4.6%, below the anticipated 4.8%, marking the lowest level since October 2021. This is attributed to a decrease in energy prices and a broader softening of price pressures, providing relief to the Bank of England. Despite this, the Bank warns that the "last mile" of reducing inflation will be challenging, forecasting a return to the 2% target in late 2025.

Wage growth in the UK, though slightly decelerating, remains at 7.7% annually. The delicate economic situation, with a flatlining economy and the highest inflation rate among large advanced economies, poses challenges for the Bank of England. The housing market shows signs of weakness, with falling house prices and rising rents, reflecting the impact of higher borrowing costs.

Despite easing inflation, MPC member Megan Greene expresses concerns about achieving the Bank's 2% inflation target, emphasizing persistent inflation pressures, high wage growth, and low productivity growth. The influence of energy price caps on inflation, coupled with global market expectations for rate cuts, adds complexity to the policy debate.

Looking ahead, UK retail sales are projected to rebound in October after a drop in September, influenced by unusually warm weather and consumer economic pessimism. The economic landscape remains uncertain, requiring careful consideration of monetary policy to navigate the complex balance between growth and stability.

Goldman Sachs economists project potential interest rate reductions by the Bank of England, starting as early as February 2024 if the UK economy faces a recession, or more likely, in August. Goldman Sachs estimates a 30% probability of an initial rate cut from 5.25% to 5% in August, with a further reduction to 4.75% by the end of 2024.

In the US, the dollar's fluctuation is influenced by US economic data, suggest a cooling economy, with a decline in producer prices and retail sales growth ending. The Federal Reserve faces uncertainty about potential interest rate cuts in response to a cooling labor market. Consequently, this could lead to the pound maintaining its stability or even becoming weaker compared to the US dollar.

Data for Technical Analysis (5H) CFD GBP/USD

Resistance : 1.2419, 1.2424, 1.2431

Support : 1.2405, 1.2400, 1.2393                

5H Outlook

Source: Investing.com

Buy/Long 1 If the support at the price range 1.2395 - 1.2405 is touched, but the support at 1.2405 cannot be broken, the TP may be set around 1.2420 and the SL around 1.2390, or up to the risk appetite.

Buy/Long 2 If the resistance can be broken at the price range of 1.2419 - 1.2429, TP may be set around 1.2435 and SL around 1.2400, or up to the risk appetite.       

Sell/Short 1 If the resistance at the price range 1.2419 - 1.2429 is touched, but the resistance 1.2419 cannot be broken, the TP may be set around 1.2401 and the SL around 1.2434, or up to the risk appetite.

Sell/Short 2 If the support can be broken at the price range of 1.2395 - 1.2405, TP may be set around 1.2385 and SL around 1.2424, or up to the risk appetite.       

Pivot Points Nov 17, 2023 03:12AM GMT

Sources: Investing 1, Investing 2