GBPUSD slides below 1.27 amid weaker UK inflation

UK Inflation bolsters summer rate cut bets…

Today’s UK CPI data came in much lower than expected for November, which bolstered bets for BOE rate cuts in the summer of 2024.

The UK’s headline inflation rate dipped below 4% for the first time since October 2021.

The fall to 3.9% from 4.6% appears to be broad based with discounting across the board.

Crucially for the Bank of England, services inflation slid to 6.3% which is some way below the peak at 7.4%.

This measure of prices is one key gauge for members of the MPC who set UK monetary policy and interest rates.

Policymakers took a noticeably different approach to the Fed last week as they explicitly pushed back against the quantity of rate cuts priced into markets for next year.

There’s no doubt this inflation data will grab the BOE’s attention, but prices still remain close to double the bank’s 2% inflation target.

Markets have shifted their rate cut bets quite dramatically after this softer report.

The first move is now seen in May with over 130bps of cuts in 2024.

This has hit GBP with cable dropping below 1.27.

Support resides around 1.2628 and then the 200-day simple moving average at 1.2511.

Near-term resistance sits at last week’s highs around 1.2794/91.

Beyond the UK, markets are slowly kicking into holiday gear as trading desks quietly kick back amid lower volumes and liquidity.

But economic data out of major economies still are worth watching.

Friday’s US Core PCE figures will also be monitored to see if it supports the Fed’s recent pivot towards rate cuts in the new year.

This week has seen Fed officials try to dampen early rate cut speculation but without much success following Powell’s comments in his press conference last Wednesday.

Money markets have forecasted a 90% chance of a 25-basis point cut by the Fed by March.

Compare that with coin toss (52% chance) for a similar move by the ECB by March 2024.

Lower US yields and more intense Fed speculation is likely to keep the USD on the defensive into the new year, promising future gains for GBPUSD.

Going forward, more resilient US data and concerted pushback from Fed officials could help the greenback, which in turn may limit the upside for GBPUSD.