GBP/USD – Markets price in more Fed rate cuts after US PPI data, UK to avoid recession?

• US PPI data weaker than expected
• UK could avoid a recession after November GDP recovery
• GBPUSD breakout coming after consolidation?

Stock markets are ending the week on a high, buoyed by weaker PPI readings from the US that suggest inflation will keep falling in the coming months.

The PPI data has repaired the damage done by yesterday’s CPI data which came in a little higher than expected. But it’s clear from today’s readings that disinflationary pressures remain in the pipeline which should give the Fed confidence over the coming months that inflation is heading back to target.

Whether we’ll see it in the PCE figures – the Fed’s preferred measure – in time for the new forecasts in March is the key question now. Those will determine whether policymakers feel comfortable cutting rates at that meeting or hold off until the second quarter, as the December dot plot indicated.

Not only are markets now almost fully pricing 150 basis points of cuts this year, but they’re pricing in a greater than 50% chance of 175, with the first heavily backed to come in March. And to think, many people thought markets ended last year too bullish on rate cuts.

Sterling steady as the UK economy performs better than expected in November

The UK could be in recession, although GDP figures for November may enable the economy to just avoid it. The economy grew 0.3% bouncing back from the -0.3% recorded in October so it all now hangs on whether the festive season delivered or not.

Either way, it doesn’t really change much as the economy is basically flatlining. Two-quarters of marginal contraction – while falling under the definition of a technical recession – doesn’t change that. The pound wasn’t particularly moved by the data.

Cable struggles near 1.28 again

We’re seeing more consolidation in the GBPUSD pair, with the price appearing to stall again near a level it’s struggled around over the last couple of months.

GBPUSD Daily

Source – OANDA

The squeeze that we’re seeing in the price may not last much longer as it approaches the tip of the triangle. A breakout in either direction could potentially be quite explosive after such a period of consolidation. The higher lows we’ve seen perhaps suggest pressure is greater from below but that doesn’t necessarily mean the breakout will be higher. Especially considering how weak the momentum indicators look.

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