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GBP/USD – Slowing Inflation to Hurt the Sterling

Daily GBP/USD Chart
Daily GBP/USD Chart

GBP/USD (1.5173)

Some points to consider in this Forex market:

  • It is expected that the headline Consumer Price Index (CPI) out of the United Kingdom will contract by 0.1 percent for the second month in a row.
  • Core rate of inflation should hold steady at an annual 1 percent for the third month in a row.

How to Trade the GBP/USD with this Data

Let’s talk about this news and how the GBP/USD Forex market will be affect4d today. Even though forecasts are for another 0.1 percent contraction with the UK CPI, the stickiness in the core CPI should improve the demand for the Sterling. This could produce a spark in the much traded GBP/USD Forex market. Especially since the Bank of England (BoE) is on a path to normalized monetary policy and hike rates.

Why is this Even Key for today?

While the BoE is on path to normalize monetary policy, small signs that inflation might pick up could cause dissent at the December 10 Monetary Policy Meeting (MPC) if policy makers see more sustainable growth on the horizon. A weaker than expected CPI, which is likely to happen today, could encourage these policy makers to extend the period of low rates even further as the economic outlook darkens.

Improved domestic demand could encourage UK firms to boost prices which would have upward pressure on the CPI, causing it to strengthen. This could cause the GBP/USD to retraces losses from earlier in November. This would also put pressure on the BoE to raise rates and normalize economic policy.

However, a weak growth in wages which has accompanied a recent weakness in the private sector should drag inflation lower. This would cause a slowdown in the core CPI producing headwinds against the Sterling as investors push bets out that the BoE will hike rates soon.

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