The British pound weakened against the dollar in early European trading on Wednesday, falling 0.2% to $1.2682, as investors reacted to the latest UK inflation figures and anticipated upcoming interest rate announcements from both the Bank of England and the US Federal Reserve.
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Newly released data from the Office for National Statistics (ONS) revealed that inflation climbed to 2.6% in November, a noticeable increase from 2.3% the previous month. While this rise aligned with market forecasts, it further deviates from the Bank of England’s (BoE) 2% target, solidifying expectations that the central bank will maintain its current interest rate policy at its final meeting of the year on Thursday.
Inflation Concerns and Central Bank Actions
Susannah Streeter, head of money and markets at Hargreaves Lansdown, commented on the situation: “Wariness is creeping into the central bank playground given that inflation is back on the see-saw, continuing to rise, after dipping below target in September. Even though the UK economy is also on the slide, with a back-to-back contraction in October and November, policymakers aren’t likely to cut rates tomorrow.”
Across the Atlantic, the US Federal Reserve is poised to unveil its interest rate decision later on Wednesday, with market consensus anticipating another rate cut. Streeter added: “With inflation not bounding up in quite such big steps in the United States, though still trending higher, the Fed is still set to cut rates later by another 0.25%. But there’s an expectation that the central bank will go slower next year, given the strength of the US economy.”
The pound also experienced a slight decline against the euro, weakening nearly 0.2% to trade at €1.2089.
Gold and Oil Market Reactions
Gold prices remained relatively stable on Wednesday morning as investors awaited signals regarding the Fed’s interest rate outlook for the coming year. Spot gold hovered around $2,648.88, while gold futures traded at $2,663.40. Lower interest rates generally benefit gold as it’s a non-yielding asset.
Deutsche Bank macro strategists noted that while another 0.25% rate cut by the Fed was widely anticipated, “the bigger question is what they’ll signal in their dot plot for next year, as there’s been speculation they could pivot in a more hawkish direction. Last time in September, the dots pointed to a further 100bps of cuts in 2025. But since then, the inflation prints have been a bit stronger than expected, so the consensus (and DB’s own forecasts) expect the FOMC to only pencil in 75bps of cuts for next year.”
Meanwhile, oil prices saw an uptick on Wednesday, influenced by both the Fed’s impending rate decision and developments within the Chinese economy. Brent crude futures rose nearly 0.6% to $73.60 per barrel, while US West Texas Intermediate (WTI) climbed almost 0.7% to $70.55.
China’s Economic Influence and FTSE Performance
Recent data indicated a slowdown in China’s retail sales growth, which rose at its slowest pace in three months at 3%. However, Chinese officials have indicated plans for increased fiscal spending in 2025 aimed at stimulating consumption. Hargreaves Lansdown’s Streeter observed, “The expectation that economic moves to boost growth in China will increase appetite for energy, which is partly why oil prices have lifted slightly.”
Furthermore, industry data from the American Petroleum Institute (API) revealed a larger-than-expected decline in US oil stocks last week, suggesting increased demand in the world’s largest economy and contributing to the upward pressure on oil prices.
In broader market activity, the FTSE 100 index experienced a modest gain of 0.3%, reaching 8,218.25 points.
In conclusion, market movements on Wednesday were largely driven by anticipation of central bank decisions and economic data releases. The pound weakened against both the dollar and the euro following higher-than-expected UK inflation figures, while gold remained relatively stable and oil prices rose modestly. These developments highlight the interconnectedness of global markets and the significant influence of economic data and central bank policies on investor sentiment.
