Pound bounces back, CPI next

• British pound surges on Tuesday
• UK inflation expected to fall to 4.4%

The British pound is sharply higher on Tuesday. In the European session, GBP/USD is trading at 1.2744, up 0.76%.

UK inflation expected to ease 

UK inflation continues to fall and a slight drop is expected in the November CPI on Wednesday. The October reading was impressive, with inflation sliding to 4.7% y/y, down from 6.7%. The market consensus for November is 4.4%. The core rate is expected to post a modest drop, from 5.7% to 5.6%.

The pound has shown surprising strength today, perhaps driven by expectations that the Bank of  England is unlikely to shift away from its ‘higher for longer’ stance even if the inflation report is softer than expected. The BoE held the cash rate at 5.25% for a third straight time last week and is showing little appetite for rate cuts, as inflation remains well above the 2% target.

BoE policy makers are content to stick with a tight policy, and at last week’s meeting, three of the nine MPC members voted to increase rates by a quarter-point. Governor Bailey said after the meeting that it was “really too early” to discuss rate cuts but did note “encouraging signs” in the drop in inflation. Bailey’s comments dampening expectations for rate cuts in 2024 sent the pound flying over 1% against the US dollar on Thursday.

The financial markets are exuberant over the Fed’s dot plot of three rate cuts in 2024, but there has been some pushback from Fed members to dampen the excitement. On Friday, New York Fed President John Williams said a rate cut in March was “premature” and even warned that rates could move higher if inflation were to stall or reverse. Cleveland Fed President Mester said on Monday that the markets are a “bit ahead” of the Fed on rate cuts, as the Fed was focused on how long it would need to maintain rates in restrictive territory rather than on rate cuts.

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GBP/USD Technical

• GBP/USD punched past resistance at 1.2660, 1.2691 and 1.2735 earlier. The next resistance line is at 1.2766
• 1.2616 and 1.2585 are providing support

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