The GBP/USD pair has dropped sharply during the early European session on Wednesday following the weaker-than-expected UK GDP growth and industrial production data. Later, on Wednesday, investors will turn their attention towards the US Producer Price Index (PPI) and the Fed interest rate decision. This will be the Fed’s last meeting of the year, and it will be followed by a press conference. On Thursday, all eyes will be on the Bank of England (BoE) and its monetary policy decision. Both events will be key and will provide fresh impetus for the Cable.
Gloomy UK data
The latest data from the Office for National Statistics on Wednesday showed that Britain’s Gross Domestic Product (GDP) contracted by 0.3% MoM in October, much lower than the 0.1% drop that was anticipated and the 0.2% increase in September.
Industrial Production data for October also disappointed as it came below market expectations at 0.8% MoM. Manufacturing Production was down by 1.1% MoM versus the 0.1% increase recorded previously.
The Bank of England (BoE) is expected to keep its interest rate unchanged at 5.25% for the third meeting in a row on Thursday. According to analysts, markets have already priced in three rate cuts for 2024, a total of 100 basis points (bps), which will push the rate down to 4.25%.
In the US, the release on Tuesday of inflation data showed that price increases in November remained restrained. The US Consumer Price Index (CPI) increased by 0.1% MoM from 0% in the previous reading and was up by 3.1% YoY in November compared with the 3.2% reading previously. The Core CPI (excluding volatile food and energy prices) grew by 0.3% MoM from the 0.2% that was expected. The annual core CPI rose by 4.0% YoY, meeting expectations.
Ahead of the interest rate decision by the Fed, we will have the release of the US Producer Price Index (PPI) for November which is anticipated to rise 0.1% MoM and 1.0% YoY. The PPI excluding food & energy is estimated to fall from 2.4% to 2.2% YoY.
Fed interest rate decision on Wednesday
The Fed is widely expected to remain on hold and keep borrowing costs steady. The markets anticipate that Fed Chair Jerome Powell will be cautious and push against expectations of rate cuts. On the other hand, the Fed fund futures are pricing in an 80% possibility of a rate cut in May, according to the CME FedWatch Tool. The markets seem to expect a total of 4 rate cuts in the coming year.
Investors will also focus on the Fed’s accompanying statement. With the US job market remaining tight and inflationary pressures elevated, analysts anticipate a hawkish Fed which will also boost the greenback. However, if the bank is more dovish and cautious, then the market’s expectations for further rate cuts will increase. This will in turn push the dollar lower. Markets will also focus on the Fed’s new dot-plot which will reveal where Fed policymakers think interest rates will be in the following year and 2025. If this surprises markets and shows that the pace of rate cuts is slower than expected, then the USD will rise. On the other hand, if more rate cuts are projected, then the USD will weaken. The release will be very important as it may affect other markets beyond the currency market such as stocks and gold, which tend to weaken when the US dollar strengthens and vice versa.
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