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The British pound finds itself in a tug-of-war, caught between rising inflation and a weakening economy, making its future path murky. Inflation, the beast currently plaguing the UK, could strengthen the pound by prompting the Bank of England to raise interest rates, attracting investors seeking higher returns. Annual inflation rate in the UK unexpectedly rose to 4% in December 2023 from a nearly two-year low of 3.9% in November, and above forecasts of 3.8%. Yet, this very same inflation act as a tax on consumers and businesses, potentially stifling economic growth and undermining the currency’s appeal. On the other hand, a faltering economy, should it materialize, could dampen the rate hike expectations, weakening the pound’s allure.
Today we learned that UK retail sales tumbled by 3.2% in December 2023, following a revised 1.4% increase in the previous month and exceeding the market expectation of a 0.5% fall. This support the view that the economy is suffering and GBP/USD could well decline in the short / medium term. The US economy is doing fine and yields in the US are expected to remain higher than UK yields. Navigating this volatility requires close attention to economic data, central bank signals, and global market sentiment, as any of these can tip the balance and send the pound on a new trajectory.
GBP/USD appears to be in a long term decline which is wave (C) in five waves [1,2,3,4,5]. The rally is wave 2, this move could be complete. The next move is wave 3 down, the target is 1.1600.
Thierry Laduguie is market analyst at www.e-yield.com
