There have been no surprises in the Cable today, with the pair slipping back down to 1.56 (1.5676) and erasing a proportion of its 200 pip gains achieved from USD weakness yesterday. There have also been no surprises with the UK economic data, where we are continuing to see the labour force improve with unemployment falling by a further 63,000 in the three months to October. However, the BoE’s Minutes also presented no surprises with the central bank’s view on inflation remaining a serious concern. Although UK inflation levels only dropped to a 12-year low at an annualised 1% yesterday, the central bank appear to be preparing for inflation to fall even lower in the coming months.
Investors know the outlook for inflation is going to continue to move lower over the coming months, which means the BoE’s strong views on weak price pressures are likely to intensify. Investors are also aware that this will then subsequently correlate in the BoE delaying interest rates rises, therefore there is little attraction towards the Pound right now.
Where does the pair go from here? That would be completely dependent on the US Federal Reserve’s FOMC statement this evening. I am not expecting the Federal Reserve to take a turn towards a dovish avenue, but if it does, it would lead to the GBPUSD benefitting from risk appetite. In the lead up to the FOMC statement, there is probably going to be further USD softness, which means the GBPUSD will find its feet at approximately 1.57 and consolidate around there.
Although the Bank of England’s (BoE) view on raising interest rates is very much a no go, especially with serious concerns arising around UK inflation levels – there is a potential reason to cheer for the UK economy. Average wage growth is now outgrowing UK inflation levels for the first time in five-year and although the BoE’s outlook on inflation is very dovish and the average wage growth will not weaken the BoE’s strong views on weak prices pressures anytime soon, this will improve consumer sentiment. Additionally, the incredible decline in oil prices could not have happened at a better time with Christmas fast approaching. We are looking at the prospect of the UK having an extremely strong period of retail sales, with consumers being the main benefiters from cheaper fuel at the petrol pumps.
Written by Jameel Ahmad, Chief Market Analyst at FXTM.
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