The British pound is drifting for a third straight day. In the European session, GBP/USD is trading at 1.2161, down 0.09%. We could see stronger volatility from the pound before the weekend, with the release of the US inflation report and UK GDP on Friday, both of which are market movers.
Will US inflation continue to drop?
There is guarded optimism ahead of the US inflation report. Inflation is projected to drop in December, which would be music to the market’s ears. The forecast for headline inflation stands at 6.5%, following the November gain of 7.1%. The core rate, which is more important, is also expected to ease, with a forecast of 5.7% in December, compared to 6.0% in November. The inflation release should result in volatility from the US dollar. If inflation, particularly the core rate, falls as expected or more, the US dollar will likely lose ground, as speculation will increase that the Fed may have to pivot from its hawkish stance and ease up on the pace of rates. Conversely, if inflation does not fall as much as expected, it would vindicate the Fed’s hawkish position, which the markets may have to grudgingly accept.
There remains a dissonance between the Fed and the markets, despite warnings by the Fed that the markets are underestimating Fed rate policy. The Fed has insisted that further rate hikes are coming, while there have been market players who are expecting a “one and done” hike in February which will wrap up the current rate cycle. The markets have priced in a peak terminal rate below 5% as well as rate cuts late in the year, while the Fed has been signalling a peak rate of 5-5.25% or even higher.
In the UK, there are no major releases on Thursday, but Friday will be busy, highlighted by monthly GDP and Manufacturing Production. The markets are braced for soft numbers, which could send the pound lower. GDP for November is expected to contract by 0.2% m/m, following a gain of 0.5% in October. Manufacturing Production for November is forecast to come in at -4.8% y/y, after a -4.6% reading in October.
- GBP/USD is putting pressure on 1.1832 and could test this line today. The next support level is 1.1726
- There is resistance at 1.1913 and 1.2026