Can the pound regain 1.34 after falling below it on hotter-than-expected US inflation?

Monday's advance fully unwinds as GBP/USD slides to its lowest level since late October.
The Fed's rate floor would reach the UK's 4.00% Bank Rate with a December hike.
Thursday brings UK third-quarter growth data, with a 0.7% expansion expected.

The Pound has surrendered Monday's entire advance, touching its lowest level since late October just above 1.3300 before stabilising near 1.3350. Following a stronger-than-expected US inflation reading, markets have fully priced in a December Fed rate hike. The UK's Bank Rate currently matches the upper end of the Fed's 3.75%-4.00% range.

TMGM Analysis: Financial Market News, Economic Calendar & Market Insights

Markets assign roughly 90% probability to a quarter-point December hike and about 10% to a half-point increase. Speaking in London, Fed Governor Waller had described a December hike as likely and a half-point move as possible; October US consumer prices subsequently exceeded expectations. Either outcome would bring the Fed's rate floor to 4.00%, a level the Bank of England (BoE) reached only after its November 5 hike.

With expectations of further BoE tightening already supporting Monday's Pound rally, fresh comments from BoE Deputy Governor Lombardelli offered little additional support against a Dollar strengthened by the US data. Lombardelli said a further near-term hike appears likely unless inflationary pressures ease clearly, pointing to a UK labour market in which companies are doing little hiring or firing.

Which upcoming releases could shape rate expectations?

A stronger third-quarter UK Gross Domestic Product (GDP) reading would reinforce BoE Deputy Governor Lombardelli's argument for another rate hike. The figures, scheduled for 07:00 GMT on Thursday, are expected to show growth of 0.7%, following 0.5%. For September alone, activity is forecast to remain unchanged after a 0.1% increase.

The size of the Fed's December 9 move, rather than whether it happens, is the focus for two upcoming events. New York Fed President Williams is scheduled for 23:30 GMT on Thursday. At 13:30 GMT on Friday, the October US producer price reading is due, with a 0.4% increase forecast compared with September's 1.3%.

How much of the Pound's rally has reversed?

More than two fifths of the advance from the October 14 low just below 1.3150 to the November 4 peak near 1.3500 has now been retraced. The November 4 peak marked the Pound's strongest level since mid-September; on November 5, the currency again failed to move past that level.

Daily price chart: GBP/USD

Pound Sterling: Frequently Asked Questions

What should you know about the Pound Sterling?

The United Kingdom's official currency, the Pound Sterling (GBP), dates back to 886 AD, making it the world's oldest currency. According to 2022 data, it ranks fourth globally by foreign exchange (FX) trading activity, representing 12% of all transactions, with an average daily value of $630 billion. Among its main trading pairs, GBP/USD, known as ‘Cable’, represents 11% of FX activity. GBP/JPY, referred to by traders as the ‘Dragon’, accounts for 3%, while EUR/GBP contributes 2%. The Bank of England (BoE) issues the Pound Sterling.

Why do Bank of England decisions matter for the Pound Sterling?

Monetary policy set by the Bank of England is the biggest single influence on the Pound Sterling's value. Decisions centre on whether the BoE is meeting its main objective of “price stability” – inflation holding steady at around 2%. Interest rate adjustments are its principal means of pursuing that objective. To contain excessively high inflation, the BoE will seek to raise interest rates, increasing borrowing costs for households and businesses. GBP generally benefits because higher rates make the UK more attractive to international investors looking to place their funds. Inflation that is too low, by contrast, signals weakening economic growth. The BoE will then consider cutting interest rates to make credit cheaper, encouraging businesses to borrow more for investment in projects that support growth.

Why does the Pound respond to economic data?

The Pound Sterling can move in response to economic releases because they indicate how well the economy is performing. GDP, Manufacturing and Services PMIs, and employment figures are among the indicators that can steer GBP. Sterling benefits from economic strength: alongside attracting greater foreign investment, it may prompt the BoE to raise interest rates, directly strengthening GBP. Weak economic readings, on the other hand, are likely to weigh on the Pound Sterling.

Why is the Trade Balance important for the Pound?

The Trade Balance is another important release for the Pound Sterling. Over a specified period, it compares a country's export earnings with its spending on imports. Strong overseas demand for a country's exports creates additional demand for its currency as foreign buyers seek to purchase those goods. A positive net Trade Balance therefore supports the currency, while a negative balance has the opposite effect.