Key Insights
- The Bank of England’s Chief Economist predicts a sharp drop in UK inflation in the coming months.
- Despite leaving the UK Bank Rate unchanged recently, the Bank of England faces challenges from above-target inflation and a sluggish economy.
- This economic uncertainty is reflected in the forex market, as the GBP/USD currency pair retreated from its recent high.
The Bank of England’s Chief Economist, Huw Pill, has indicated that UK inflation is expected to see a significant drop in the coming months. His comments have resonated with the financial markets, which are now pricing in the possibility of three quarter-point interest rate cuts in the UK next year.
This follows the recent decision by the Bank of England to keep the UK Bank Rate steady, as it grapples with elevated inflation levels and a sluggish economy. The latest data from S&P Global CIPS Services reveals a third consecutive month of economic decline in the UK, raising concerns about the country slipping into a technical recession, which is expected to be confirmed by this Friday’s GDP release.
Market reactions to these factors have been seen in the yields on UK government bonds. The UK 2-year Gilt’s yield hit a fresh five-month low, while the 10-year benchmark’s yield is approaching multi-week lows. This shift in yields reflects the anticipation of potential rate cuts.
GBP/USD Technical Outlook
In the foreign exchange market, the recent rise of GBP/USD has faltered, with the pair retreating below the 1.2300 level after reaching a high of 1.2428 on Monday. This dip is accompanied by a weakening US dollar as traders start pricing in a series of interest rate cuts in the United States next year.
From a technical standpoint, the 200-day simple moving average (SMA) posed resistance at the beginning of the week, with further resistance at 1.2447 and the 50% Fibonacci retracement level at 1.2471. The next support level is seen around 1.2200.