Cable Continues Plunging Behind NFP

Cable hit a 14-month low as traders await inflation data that will shape decisions from both the BOE and Fed in their upcoming meetings.

Sterling to 14-Month Low Amid Dollar Strength

The GBPUSD reached a fresh 14-month low on Friday due to higher yields stemming from an upbeat employment report in the US. Investors started to consider that the Fed might not only refrain from easing this year but actually hike interest rates provided the economy remains healthy and supportive of consumer prices. The next crucial data release to influence market expectations is the CPI figures scheduled for Wednesday. Prior to that, investors may acquire additional clues into pricing pressures with the release of the US PPI on Tuesday. The monthly PPI change is expected to decelerate slightly to 0.3% from the previous 0.4%, partly due to lower energy costs observed last month, while the core rate is expected to remain unchanged at 3.4%.

In the aftermath of the Non-Farm Payrolls (NFP) figures last Friday, futures markets priced out a second rate hike from the Fed this year while leaving the outlook for the next meeting largely unchanged, as there was a near-universal consensus that the Fed would pause in January. A strong inflation report would likely confirm this shift in sentiment, keeping the trend in the dollar intact, though a market more concerned about growth could weigh on the stock market. However, a substantial miss in the inflation data could suggest that the expected rise in inflation through the winter may last less than expected and could restore confidence that the Fed will proceed with a second rate cut. US headline inflation in December is projected to rise to 2.9% year-on-year (YOY) from the 2.7% reported in November, but the core rate is anticipated to remain steady at 3.3%.​

The Situation in the UK Remains Complicated

Ahead of the US CPI, the UK's Office for National Statistics (ONS) will release its own inflation data for December, which is expected to remain the highest among the G7 nations. This poses a significant challenge for a BOE lowering interest rates to support its economy while attempting to ease concerns that have recently driven gilt yields to multi-year highs. The consensus forecast suggests that the headline inflation rate will rise to 2.7% from 2.6% in November, with energy costs being the primary focus as Europe as a whole faced higher fuel prices at the end of the year. In the near term, there may be no relief on this front, as British stockpiles have decreased due to an early onset of cold weather, with several months of winter still ahead.

Some relief could come from the expected decrease in the core inflation rate to 3.4% from 3.5%, which could reinforce the narrative that headline inflation would peak during the winter before stabilising in the spring. If this trend is maintained, the market could be reassured that the BOE will proceed with its planned February interest rate cut. Nevertheless, even if higher inflation suggests that interest rates will remain high for an extended period, the potential negative implications for the British economy could actually cause the pound to depreciate.​

Pound DCB Pattern Signals Further Downside

Following a series of sessions in red, Cable has formed a dead cat bounce (DCB) pattern, suggesting further downside potential. After falling sharply from 1.3050 to the 1.2500 handle, the price staged a temporary recovery near 1.2810 before resuming its downward trajectory. The confirmation came as the price broke below 1.2350 and left behind resistance at 1.2575, indicating sellers remain in control. With the length of the pre-formation impulse extending 55 pips, the pair could eye the 1.1950 level if the next support at 1.2035 and the 1.2000 psychological level fails to hold.

Source: SpreadEx / GBPUSD

Key Takeaways

The pound continues to face pressure as traders digest the US employment report ahead of upcoming inflation data from both the UK and the US. While the odds of Fed easing diminish, core inflation is expected to stay unchanged in the US but ease slightly in the UK. As both headline figures are expected to rise, a larger uptick in the UK figure could complicate the BOE's path toward normalisation as the country grapples with rising borrowing costs. The technical picture also remains bearish following a dead cat bounce formation, suggesting sterling could extend losses toward 1.2000 unless fundamentals shift dramatically.