The Pound Sterling (GBP) exhibited strength in Monday’s European session, maintaining a six-day high near 1.2620, as the Bank of England (BoE) is expected to prolong its current interest rate stance. Persistent price pressures in the UK economy, driven by stubborn service inflation, steady labor demand, and robust household spending, contribute to the BoE’s ability to uphold a hawkish narrative.
Last week’s surprisingly positive UK Retail Sales data indicated that the impact of the BoE’s higher interest rates on consumer spending is diminishing. This suggests an earlier-than-expected exit from the technical recession that gripped the UK economy in the second half of 2023. During this period, the BoE maintained higher interest rates to curb inflation, which significantly affected consumer spending and business operations.
The GBP/USD pair rose as the Pound Sterling attracted higher foreign inflows amidst the BoE’s extended hawkish stance. The trajectory of both the Pound Sterling and the US Dollar will be influenced by the forthcoming preliminary S&P Global Manufacturing PMI for February.
In the daily digest of market movers:
Pound Sterling retains a six-day high near 1.2620, with the persistent service inflation and robust Retail Sales data pushing back expectations of early rate cuts by the Bank of England.
Annual Retail Sales unexpectedly rose by 0.7%, surpassing investor expectations of a 1.4% decline. In December, economic data contracted sharply by 2.4%.
The Office for National Statistics (ONS) reported a 3.4% growth in food retail sales for January, contributing to the rise in Retail Sales data.
Upbeat Retail Sales data underscores a persistent inflation outlook, allowing the BoE to keep interest rates higher during periods of elevated inflation.
BoE policymakers Katherine Mann and Huw Pill highlighted concerns about persistent service inflation as a catalyst for price pressures.
Latest inflation data showed steady headline and core Consumer Price Index (CPI) figures, while service sector inflation accelerated to 6.5% from 6.4% in December.
Mann emphasized focusing on forward economic indicators, indicating a persistent inflation outlook despite the downturn in the second half of 2023.
Huw Pill highlighted the importance of easing inflation data for several months to convince policymakers of sustainable inflation returning to the desired target.
Meanwhile, the US Dollar Index (DXY) declined towards a weekly low around 104.00 amid positive market sentiment. Trading volume is expected to remain light with US markets closed for Presidents’ Day.
In technical analysis, Pound Sterling trades close to a five-day high, reaching around 1.2620. The GBP/USD pair approaches the 50-day Exponential Moving Average (EMA) at 1.2630, signaling a cautious “wait and watch” approach for market participants. The Pound Sterling bulls find support near the 200-day EMA at 1.2500.
The 14-period Relative Strength Index (RSI) oscillates in the 40.00-60.00 range, indicating a consolidation phase ahead.
