Pound (GBP) New Peril: UK Inflation Dive Sparks Concerns

Pound GBP decline: UK inflation sparks economic concerns, speculations of BoE rate cuts. Key resistance and support levels are analyzed.

In a significant economic development, the British pound experienced a sharp decline following the release of the UK Consumer Price Index (CPI) report, revealing a substantial drop in inflationary pressures across both headline and core metrics. This latest economic data starkly contrasts previous indications that UK inflation was more robust than other developed economies such as the euro area and the United States.

The UK CPI now stands at levels last witnessed in September 2021, signaling a concerning trend. According to a report from the Office for National Statistics, contributing factors to this downturn were identified in transport, recreation, and culture, as well as food and non-alcoholic beverages. Chancellor Hunt acknowledged the challenging situation, stating, “There is still further to go on inflation; it never declines in a straight line.” However, market observers remain skeptical, emphasizing the significance of the actual data over official statements.

Pound (GBP) New Peril: UK Inflation Dive Sparks Economic Concerns

The impact of stringent monetary policy measures is becoming evident as consumers exhibit reluctance to spend, resulting in decreased demand for goods and services. Retail sales figures further underscore the potential limitations on the upside for the pound should the current trajectory persist.

Market expectations for the Bank of England (BoE) rate path have undergone a noteworthy dovish repricing, with projections indicating cumulative interest rate cuts of approximately 116 basis points by December 2024. The Bank of England could implement the first rate cut as early as May 2024, and if the disinflationary trend persists, policymakers are also contemplating a cut in February 2024.

Analyzing the daily GBP/USD price action, there are indications of bearish/negative divergence, with the Relative Strength Index (RSI) showing lower highs. Considering the latest developments, this prompts concerns among traders, who may seek to retest the psychological handle 1.2500 and the 200-day moving average.

Keep an eye on key resistance levels at 1.2900, 1.2848, and 1.2746, and pinpoint crucial support levels at 1.2500/200-day MA and 1.2400/50-day MA.

Regarding market sentiment, retail traders are currently net short on GBP/USD, with 53% holding short positions. While 51% of clients are net long, there has been a recent decrease in long positions, indicating a cautious outlook among traders.

As the pound faces increased pressure amid economic challenges, the financial markets are closely watching for further developments, particularly any potential shift in the BoE’s monetary policy stance.

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