By Noam Bennaiche
Sterling has struggled to find a clear direction this week, but has shown relative resilience against the Euro. On Wednesday, UK inflation surprised to the downside, with headline CPI falling to 3.2% in November. While this strengthens the case for lower interest rates, it also suggests inflation is cooling in an orderly manner, giving the Bank of England scope to proceed cautiously rather than aggressively. This nuance has helped limit downside pressure on Sterling.
The Bank of England delivered a widely expected 0.25% rate cut, though the decision was heavily divided, highlighting uncertainty over the pace of future easing. While markets continue to price in further cuts next year, the lack of clarity over timing has helped stabilise GBP, particularly against the Euro. In contrast, the European Central Bank once again held rates steady at 2%, but slow Eurozone growth continues to weigh on the outlook for the single currency. With pressure building on the ECB to cut rates in the months ahead, policy divergence has helped cap gains in EUR/GBP.
The US Dollar has also struggled to gain traction, as signs of a cooling US labour market reinforce expectations that the Federal Reserve will continue cutting rates into next year. US CPI eased to 2.7% in November, below the 3.1% forecast, while core CPI slowed to 2.6%, missing expectations of 3.0% and marking the weakest pace since 2021, according to BLS data released on Thursday. Meanwhile, President Donald Trump stated that the next Federal Reserve chair will strongly favour lower interest rates, with a successor to Jerome Powell expected to be announced soon. The US Dollar edged slightly higher as traders turned cautious ahead of the University of Michigan Consumer Sentiment data.
With central banks increasingly shifting their focus from beating inflation to supporting growth, relative policy paths will remain a key driver for currency markets. Against this backdrop, Sterling may continue to find modest support versus the Euro, although near-term volatility is likely to remain elevated.
This morning, UK retail sales fell by 0.1% month-on-month in November, following a revised 0.9% decline in October, missing expectations for a 0.4% increase. Core sales (excluding fuel) declined by 0.2% MoM, also below forecasts for a 0.2% rise. On an annual basis, retail sales rose by 0.6%, below the 0.9% consensus, while core sales increased by 1.2% versus expectations of 1.6%.
Pressure on the Pound is expected to persist beyond the final full trading week of the year. As we move toward the end of December, reduced economic data releases could result in volatility, particularly amid mixed UK data that has left Sterling without a clear direction. If you have an upcoming international transfer, speak to one of our Currency Consultants so we can help you to make your money go further.