Challenges for the Pound After Inflation and GDP Edge Down

All of the major releases from the UK in the last fortnight were at least slightly surprising, with inflation and GDP unexpectedly declining slightly while claimant count change was much better than the consensus. Sentiment remains weak, though, with traders concerned about British public borrowing. This article summarises recent important news from the UK then looks briefly at the charts of GBPUSD and EURGBP.

Annual headline inflation in Britain moved down to 2.5% in December against the 2.6-2.7% expected:

Although it’s too early to say with any certainty that inflation will stabilise below 3%, it looks like upward pressure has declined somewhat in recent months. The outlook for demand from consumers is generally mixed amid lacklustre confidence. Inflation for food, alcoholic drinks, restaurants and hotels all slowed last month. 2.5% annual headline inflation for December is in line with the Bank of England’s forecasts.

Final British GDP for the third quarter was nil, revised slightly downward from the first estimate of 0.1%. Weaker growth after Q1 2024’s relatively strong initial exit from the technical recession suggests that the Bank of England might have more scope for cutting rates this year compared to, say, the Fed. The majority of expectations points towards about 0.65% as the total of cuts by the BoE this year, but that’s very likely to change in the next few months as new data become available.

21 January’s job report from the UK was overall much stronger than expected. Although unemployment in November edged up to 4.4%, claimant count change was highly positive:

The latest figures from the Office for National Statistics indicated only 700 new claimants in December compared to expectations of more than 10,000. November’s figure was also revised sharply downwards to negative 25,100; the initial figure had been positive 300. That’s the biggest single month’s drop in claimants since May 2023.

The larger than expected budget deficit in Britain last month is probably the main reason traders didn’t react more strongly to the good job report. Public borrowing in December at around £17.8 billion was about £10 billion more than the same period in 2023.

Donald Trump’s inauguration and subsequent rapid-fire executive orders brought some positivity to forex markets since the new president didn’t immediately order extra tariffs. Although the expected tariffs are likely to hit the EU, Canada and Mexico a lot harder than the UK, traders might remain reluctant to commit and wary of sudden movements in the next few weeks.

Cable Struggles to Sustain Monday’s Bounce

Monday’s bounce as the USA took a day off for the inauguration was quite vigorous but doesn’t seem to alter the overall technical picture significantly. With the BoE expected to cut about 0.15% more than the Fed this year in total and ongoing concerns about the British government’s budget and the country’s growth, the fundamental situation seems to favour more losses.

$1.21 is still in view as a support while the test of the 38.2% monthly Fibonacci retracement around $1.233 seems to have failed for now. There’s no clear signal from the stochastic oscillator or ATR.

The next obvious target below would be around $1.20, but there’d probably need to be a significant uptick in selling volume for that to be achievable ahead of next week’s meeting of the Fed. Meanwhile on Friday 24 January traders of cable will concentrate on British consumer confidence and flash PMIs.

Euro-Pound’s Upward Momentum Seems to be Declining

Considering monetary policy alone, it seems questionable whether euro-pound’s recent strong gains are sustainable since the current difference in rates of 1.75% in favour of the pound probably won’t shrink more than 0.2 or 0.3% this year. That said, sentiment on the pound has deteriorated markedly in recent weeks as the British government’s borrowing has accelerated, inflation in the UK declined and the economy was overall stagnant in the third quarter of 2024.

A gain of more than 1.5p by EURGBP in only about a fortnight is quite unusual. 84.5p was the area of the high at the very end of October last year, so this seems to be more established now as a resistance with several fairly large wicks over the last several periods. The 23.6% monthly Fibonacci retracement is a long way off at around 89p. If there’s a break above the current area, last summer’s highs around 85.5p or maybe slightly higher would seem to be more realistic for the near future.

Neither the 200 SMA nor the 38.2% Fibo gave notable resistance earlier this month, so it’s questionable how strong they might be as supports. A lot depends on the ECB’s press conference and preliminary inflation from the eurozone next week.

This article was submitted by Michael Stark, an analyst at ExnessExness.

The opinions in this article are personal to the writer. They do not reflect those of Exness or FX Empire.