The UK Office for National Statistics is set to release November’s Consumer Price Index, anticipated to show a year-over-year decrease to 3.5% from October’s 3.6%. Monthly inflation is projected to be flat, following a 0.4% rise in October. The core CPI, excluding food and energy prices, is expected to remain at a 3.4% year-on-year increase.
The GBP/USD pair has risen to around 1.3425 during the early Asian session, owing to positive UK preliminary PMI data. The UK Composite PMI increased to 52.1, surpassing estimates of 51.4, with the Services and Manufacturing PMI at 52.1 and 51.2, respectively. These figures, exceeding market expectations, added support to the Pound Sterling against the US Dollar.
Gbp Usd Surge
The GBP/USD surged by 0.42% on Tuesday, bolstered by weaker US jobs data and steady Retail Sales. It was trading at 1.3432, having reached a daily low of 1.3355. US Nonfarm Payrolls were reported at 64K, surpassing the expected 50K, with the Unemployment Rate increasing from 4.4% to 4.6%, slightly above the Federal Reserve’s estimate of 4.5%.
The immediate focus for us is the UK inflation data due out today, December 17th. With core inflation expected to hold steady at 3.4%, any surprise could trigger significant moves in the pound. This stickiness reminds us of the challenges the Bank of England faced back in 2023 when core CPI remained stubbornly above 6% for several months, complicating monetary policy.
On the other side of the pair, the US dollar looks vulnerable following the weak 64K jobs print and a rise in unemployment to 4.6%. We saw a similar dynamic in late 2023 when slowing job growth and a rising unemployment rate to 3.9% caused markets to rapidly price in Federal Reserve rate cuts. This suggests that buying options to protect against further dollar weakness could be a prudent strategy heading into year-end.
Despite inflation concerns, the upbeat UK PMI data from yesterday shows underlying economic resilience, with the composite figure hitting 52.1. This strength in the services sector provides a solid floor for the pound, especially when contrasted with the weakening US labor market. Traders might consider this a signal to maintain long sterling positions, perhaps using futures contracts to express that view.
Anticipated Volatility
Given these conflicting signals, we anticipate a rise in short-term volatility around the pound. The Cboe Volatility Index (VIX) is currently trading around 13.5, which is relatively low historically, suggesting options may be cheaply priced. This environment is well-suited for option strategies that can profit from a sharp price swing following the CPI release, regardless of the direction.
