1.34 gives way again as pound retreats after hot US inflation report

GBP/USD hits its lowest since late October, reversing Monday's advance.
4.00%: a December Fed hike would bring its rate floor into line with the UK's Bank Rate.
0.7% UK third-quarter growth forecast ahead of Thursday's release.

GBP/USD has fallen to just above 1.3300. The decline erased Monday's entire advance and took the pair to its lowest since late October, before it stabilised near 1.3350. A hotter-than-expected US inflation report has prompted markets to price in a December Fed hike fully. 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

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

Unless inflation pressures ease clearly, another near-term rate increase looks likely, according to BoE Deputy Governor Lombardelli. She pointed to a UK labour market characterised by limited hiring and firing. Expectations of further BoE tightening had already supported Monday's Sterling advance. Her comments therefore offered little additional support against a Dollar strengthened by the US data.

0.7% UK GDP Forecast Leads the Calendar

At 07:00 GMT on Thursday, the UK releases third-quarter Gross Domestic Product (GDP). Growth is forecast at 0.7%, following 0.5%, while September alone is expected to show no growth after a 0.1% increase. A stronger quarterly reading would reinforce BoE Deputy Governor Lombardelli's argument for another rate rise.

Thursday's schedule also includes New York Fed President Williams at 23:30 GMT. The October US producer price figure follows on Friday at 13:30 GMT, with a 0.4% forecast compared with September's 1.3%. Both events are relevant to the scale of the Fed's 9 December move, rather than whether it takes place.

More Than Two Fifths of Sterling's Rally Reversed

More than two fifths of the advance from the 14 October low just below 1.3150 to the 4 November peak near 1.3500 has now been retraced. That peak marked Sterling's strongest level since mid-September. On 5 November, the Pound's advance stalled at the same level.

GBP/USD: Daily Chart

Pound Sterling: Key Questions

Pound Sterling: What Are Its Main Characteristics?

12% of global foreign exchange (FX) transactions involve the Pound Sterling (GBP), according to 2022 data. Average daily trading totals $630 billion, making it the world's fourth most traded currency. Sterling is the United Kingdom's official currency and, dating to 886 AD, the oldest currency in the world. Among its main trading pairs, GBP/USD, known as ‘Cable’, represents 11% of FX trading. 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.

Bank of England Policy: The Impact on Sterling

Around 2% is the steady inflation rate the Bank of England targets in pursuit of its primary objective of “price stability”. Its monetary policy decisions are the most important influence on Sterling's value. To determine policy, the BoE assesses whether that objective has been met, using interest rate adjustments as its main tool. To curb excessive inflation, the BoE raises interest rates, increasing borrowing costs for households and businesses. GBP generally benefits because higher rates make the UK a more attractive destination for international investors' funds. By contrast, inflation that is too low signals slowing economic growth. The BoE will then consider cutting rates to reduce borrowing costs, encouraging businesses to borrow more and invest in projects that generate growth.

Economic Data: What Drives the Pound's Response?

The economy's health, as reflected in data releases, can affect Sterling's value. GDP, Manufacturing and Services PMIs, and employment figures are among the indicators that can shape GBP's direction. Sterling benefits from economic strength, which attracts additional foreign investment and may also prompt the BoE to raise interest rates, directly strengthening GBP. Weak economic readings, by contrast, are likely to weigh on the Pound Sterling.

Trade Balance: The Implications for Sterling

The Trade Balance is another important release for Sterling, measuring a country's export earnings against its spending on imports over a specified period. 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 strengthens the currency, while a negative balance has the opposite effect.