British pound calm in holiday-thin markets

The British pound is almost unchanged on Tuesday. In the European session, GBP/USD is trading at 1.2709, up 0.11%. UK banks are closed for a holiday today, which means the pound is likely to have a quiet day.

The UK ended last week on a mixed note. Retail sales jumped 1.3% bouncing back from no growth in October. The GDP report for the third quarter declined by 0.1%, compared to the initial estimate of no growth. Manufacturing and construction were higher than the estimates, but services, which account for most of the economy, declined by 0.2%. There was more bad news as GDP for Q2 was revised lower to no growth, down from the initial estimate of a 0.2% gain. The numbers show that the UK economy is at risk of tipping into a recession as we enter 2o24.

The Bank of England has paused the cash rate at 5.25% for three straight times and the current rate-tightening cycle looks to be over. Governor Bailey has pushed back against rate cut expectations, saying that he will maintain the ‘higher for longer’ approach. That could change, depending on the strength of the data between now and the next meeting on 1 February. If UK key releases are weaker than expected, the central bank may have to consider trimming rates early in 2024.

The US released the PCE Price Index, which is the Federal Reserve’s preferred inflation indicator, on Friday. The headline reading fell to 2.6% y/y in November, down from a downwardly revised 2.9% in October and lower than the market consensus of 2.8%. The core rate eased to 3.2%, down from a downwardly revised 3.4% and lower than the market consensus of 3.3%.

The drop in inflation supports the case for rate cuts next year. However, personal spending and income were higher than expected and could temper these expectations. Personal income edged up to 0.4% m/m in November, up from an upwardly revised 0.3% in October and matching the consensus estimate. Personal spending gained 0.2%, up from a downwardly revised 0.1% and shy of the consensus estimate of 0.3%.

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GBP/USD Technical

• GBP/USD tested resistance at 1.2703 earlier. The next resistance line is 1.2732
• 1.2670 and 1.2641 are providing support

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