British Pound Drifts Lower Against Euro and Dollar After UK Inflation Data

December 19, 2024 - Written by Frank Davies

STORY LINK British Pound Drifts Lower Against Euro and Dollar After UK Inflation Data

The Pound Sterling (GBP) drifted lower against the Euro (EUR) nd U.S. Dollar (USD) after the latest UK inflation data. Although very close to expectations, markets were slightly more optimistic that there would be scope for more than two rate cuts next year.

There are also expectations that the Federal Reserve will accompany a US rate cut later in the day with cautious guidance over the potential for further cuts early next year which helped underpin the dollar.

The Pound to Dollar (GBP/USD) exchange rate retreated to 1.2680 from 1.2720.

According to ING; “We expect the Federal Reserve to deliver a consensus 25bp cut today, but also to scale back on guidance for rate cuts next year. We think this will allow the dollar to stay firm into year-end as wide differentials remain highly favourable for the greenback.”

UK consumer prices increased 0.1% in November with the year-on-year inflation rate increasing to 2.6% from 2.3%. This was in line with consensus forecasts but the highest reading for 8 months.

The core rate increased to 3.5% from 3.3%, slightly below expectations of 3.6%.

ONS chief economist Grant Fitzner commented; “Inflation rose again this month as prices of motor fuel and clothing increased this year but fell a year ago.”

He added; “This was partially offset by air fares, which traditionally dip at this time of year, but saw their largest drop in November since records began at the start of the century.”

The goods annual rate rose from -0.3% to 0.4%, while the services rate was unchanged at 5.0%.

ING commented; “Our core services metric, which strips out all the volatile stuff and also rents/hotels (i.e., elements that the Bank of England is less bothered about) did tick higher from 4.5 to 4.7%.”

Assuming that the Bank of England has decided to leave interest rates at 4.75% at this week’s policy meeting, the latest inflation data is unlikely to shift their thinking.

According to MUFG; “overall there is no compelling information in this inflation data to suggest any change in expectations in regard to BoE policy expectations.”

Neil Birrell of Premier Miton Investors commented; “Attention will now focus on retail sales, particularly over the key Christmas period, which will give guidance on how the consumer sector is holding up. The outlook for the economy remains on a bit of a knife edge.”

From a medium-term perspective, there was a small shift in 2025 expectations.

Traders are now betting that there is just over a 30% chance of three interest rate cuts by November next year compared with 11% ahead of the data.

Deloitte chief economist Ian Stewart warned that elevated wages growth and higher government spending would put upward pressure on inflation.

According to Stewart; “The big declines in inflation are behind us. Next year inflation is likely to run closer to 3.0% than to its 2.0% target.”

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TAGS: Pound Sterling Forecasts