Sterling dips, markets await US Core PCE

The British pound is slightly lower on Friday. In the European session, GBP/USD is trading at 1.2366, down 0.37%.

Will US Core PCE continue to drop?

There are no UK releases today, so all eyes will be on the US Core PCE, which is considered the Federal Reserve’s preferred inflation indicator. The forecast stands at 4.3% y/y for December, following 4.7% in November. If the print is in line with the forecast, it will mark a fourth straight decline in inflation.

The Core PCE release, even if it misses expectations, won’t change the outcome of the Fed meeting next Wednesday. The CME’s Fed Watch has pegged the likelihood of a 25-basis point hike at 98%. Still, the meeting could have a strong impact on the US dollar, depending on the tone of the rate statement and Fed Chair Powell’s follow-up remarks. The Fed has been very consistent in its hawkish stance, reiterating that rates will stay high and there are no plans to cuts rates, in contrast to the markets, which are expecting rate cuts late in the year. If the Fed repeats its hawkish stance at the meeting, it could give a lift to the US dollar.

The Bank of England holds its meeting just a day after the Fed on Feb. 2. The central bank is widely expected to raise rates by 0.50%, which would bring the cash rate to 4.0% and would be a 10^th straight rate increase. Despite the significant tightening, inflation is running at a sky-high 10.5%, meaning that the BoE can’t even think about a pause in its rate-tightening cycle. The terminal rate is likely to be reached at 4.25%-4.5%, so we’re likely to see one or two more rate hikes in the first half of the year. For the BoE, the first sign of success against inflation will be to bring it back to single digits, after four straight months above 10%.

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GBP/USD Technical

• 1.2335 and 1.2233 are providing support
• There is resistance at 1.2446 and 1.2499

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