The UK Office for National Statistics will soon release the November Consumer Price Index (CPI). It’s expected to show a slight decrease in inflation, dropping to 3.5% from 3.6% in October. Monthly inflation is likely to remain unchanged after a 0.4% increase last month. The core CPI, which excludes food and energy, is predicted to stay at a 3.4% year-on-year rise.
The GBP/USD exchange rate rose to about 1.3425 during the early Asian session, thanks to encouraging preliminary PMI data from the UK. The UK Composite PMI climbed to 52.1, beating estimates of 51.4. The Services and Manufacturing PMIs stand at 52.1 and 51.2, respectively. These stronger-than-expected numbers have supported the Pound Sterling against the US Dollar.
GBP/USD Surge
On Tuesday, GBP/USD surged by 0.42%, driven by weak US jobs data and stable Retail Sales. It traded at 1.3432 after hitting a daily low of 1.3355. The US Nonfarm Payrolls came in at 64K, exceeding the expected 50K, while the Unemployment Rate rose from 4.4% to 4.6%, slightly above the Federal Reserve’s estimate of 4.5%.
Right now, we are focused on the UK inflation data coming out today, December 17th. With core inflation expected to remain steady at 3.4%, any unexpected results could lead to significant movements in the pound. This situation is reminiscent of the challenges the Bank of England faced in 2023 when core CPI stubbornly stayed above 6% for months, complicating their monetary policy.
On the other hand, the US dollar appears weak after the disappointing jobs report and the unemployment rate increasing to 4.6%. A similar situation occurred in late 2023 when slowing job growth and a rising unemployment rate of 3.9% led to quick adjustments in market expectations for Federal Reserve rate cuts. This suggests that purchasing options to safeguard against further dollar weakness might be a wise choice as we head to year-end.
Even with inflation worries, the positive UK PMI data shows economic resilience, with the composite number reaching 52.1. The strength of the services sector offers a solid support for the pound, especially when compared to the weakening US labor market. Traders may see this as a good time to keep their long positions on sterling, possibly using futures contracts to capitalize on this view.
Expected Volatility
Given these mixed signals, we anticipate an increase in short-term volatility around the pound. The Cboe Volatility Index (VIX) is currently at about 13.5, a relatively low level historically, indicating that options may be favorably priced. This environment is ideal for option strategies that can benefit from significant price movements after the CPI release, regardless of the direction.
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