GBP starts the upcoming week with a positive technical momentum, indicating a favourable outlook against both the EUR and USD. However, the release of midweek inflation figures may pose a challenge to recent advancements.
GBP received a boost from the Bank of England's latest policy decision and guidance, where the Bank cautioned that inflation risks remained elevated, and the possibility of further rate hikes could not be definitively ruled out. This message was reinforced on Friday by December PMI figures, revealing a surprisingly robust increase in economic activity. The survey also highlighted persistent price pressures in the services sector, lending credibility to the Bank of England's guidance and supporting the Pound.
In contrast, Eurozone PMI figures disappointed, raising doubts about the European Central Bank's assertion that interest rates would stay higher for an extended period. This disparity in economic performance between the UK and the Eurozone was reflected in the rise of the GBP/EUR rate. Observers of this exchange rate should note that GBP/EUR has struggled to surpass 1.17 consistently in 2023, and caution is advised against expecting a sustained rally above this level.
The forecast for the GBP/USD exchange rate in the week ahead is optimistic, fuelled by the +1.5% surge observed last week, contributing to a positive momentum dashboard advocating for further gains. The rebound above 1.27 follows the U.S. Federal Reserve's guidance last week, which tacitly supported market expectations for multiple rate cuts in 2024. Fed Chair Jerome Powell's acknowledgment of the risks of maintaining restrictive interest rates for too long influenced this development.
However, GBP/USD faced a setback on Friday following comments from Federal Reserve board member John Williams, injecting a dose of reality into the exuberant market response to the Fed's midweek interest rate decision and guidance update.
This week's UK inflation data, scheduled for release on Wednesday at 07:00 GMT, has the potential to reinforce the recent GBP-supportive narrative if it exceeds expectations. The consensus forecast anticipates a year-on-year CPI inflation rate of 4.3%, down from the previous 4.6%, with the core CPI reading expected at 5.5%. A lower-than-expected outcome could exert pressure on GBP cross rates during the midweek session.
