- The Pound Sterling weakens following robust US PPI data, reducing demand for risk-sensitive assets.
- After a contraction in the second half of 2023.
- the UK economy rebounds, prompting investors to seek updated guidance on BoE interest rates.
In the early New York session on Thursday, the Pound Sterling (GBP) experiences a sharp decline against the US Dollar, following the release of the United States Producer Price Index (PPI) data for February, which surpassed expectations. This leads to a decrease in investors’ risk appetite, as they anticipate that elevated US PPI figures will reinforce concerns about a potential delay in the Federal Reserve (Fed) plans to lower interest rates. Presently, the prevailing market sentiment suggests that the Fed might enact this adjustment in June.
Simultaneously, the US Dollar Index (DXY) climbs to 103.00, buoyed by diminished expectations of a Fed interest rate cut in the upcoming June policy meeting, thereby enhancing its safe-haven allure. However, the Retail Sales data for February falls short of expectations, with modest growth of 0.6%, compared to the anticipated 0.8%. This follows a significant contraction of 1.1% in January’s Retail Sales figures.
Daily digest market movers: Pound Sterling falls vertically as US PPI turns out stubborn than expectations
The Pound Sterling dips below 1.2800 against the US Dollar, reacting to the resilient United States Producer Price Index (PPI) data for February. The monthly headline PPI surged twofold compared to expectations and the previous reading of 0.3%. Moreover, the annual headline PPI accelerated to 1.6% from the consensus of 1.1% and January’s figure of 1.0%.
The annual core PPI, excluding volatile food and energy prices, steadily rose by 2.0%, exceeding expectations of 1.9%. Meanwhile, the monthly core PPI increased at a faster pace of 0.3% compared to expectations of 0.2%. This persistence in PPI data suggests that consumer price inflation may remain elevated, potentially tempering expectations for the Federal Reserve to lower interest rates in the June policy meeting.
The Pound Sterling may find support following Wednesday’s release of UK monthly Gross Domestic Product (GDP) and factory data for January, indicating as expected a 0.2% growth in the economy. This growth was propelled by increased demand in retail and sales of house-building materials, although Industrial Production remained lackluster.
The anticipated growth in the UK economy at the onset of 2024 offers some relief to UK Prime Minister Rishi Sunak ahead of elections mandated by the end of January 2025. Chancellor of the Exchequer Jeremy Hunt commented on the positive economic indicators, stating, “While the last few years have been tough, today’s numbers show we are making progress in growing the economy,” as reported by Reuters.
Although the UK economy has rebounded after slipping into a technical recession in the latter half of 2023, it’s premature to determine the depth of the recession’s impact until comprehensive data for the first quarter demonstrates expansion. The Office for Budget Responsibility (OBR) forecasts the UK economy to grow by 0.8% in 2024.
Looking ahead, market sentiment regarding potential Bank of England rate cuts will dictate the Pound Sterling’s trajectory. Investor anticipation for a BoE interest rate reduction in the August meeting has strengthened due to slower-than-expected wage growth in the three months ending January.
Technical Analysis: Pound Sterling falls below 1.2800
Amid a gloomy market sentiment, the Pound Sterling slips below 1.2800. The 20-day Exponential Moving Average (EMA) hovers around 1.2730, displaying a gradual upward trend, which suggests a modest demand in the near term. Additionally, the 1.2700 round-level support is expected to serve as a robust buffer for Pound Sterling bulls.
The 14-period Relative Strength Index (RSI) fluctuates within the 60.00-80.00 range, indicating a sustained and robust bullish momentum.
