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Sterling Sinks on Soft CPI, But Underlying Bull Theme Intact for Now

FOREX
  • GBP/USD holds the vast majority of the post-CPI losses, after inflation slowed markedly faster than forecast in November. Core CPI posted a 0.6ppts drop to hit a new post-COVID low of 5.1%. Monday's lows of 1.2629 the next notable downside level in the pair, keeping GBP as the poorest performing currency across G10, reflecting the retracement in yields across both STIR and Gilt markets.
  • Much of the weakness stemming from the adjustment in '24 rate expectations, with the biggest moves in STIR seen across the Sep24 / Dec24 contracts - culminating in over 5 x 25bps rate cuts being priced for the next calendar year.
  • Today's weakness refutes the previously bullish theme in GBPUSD, after key resistance and the bull trigger at 1.2733, the Nov 29 high, had been cleared. Notable support undercuts at 1.2600, the 20-day EMA. The pullback from last Friday’s high is considered corrective, but further weakness could reinforce a pullback.
  • JPY is the firmest currency in G10, reversing a small part of yesterday's post-BoJ weakness. EUR/JPY failed to materially top key resistance at the 158.76 100-dma on Tuesday, prompting small selling into today's NY crossover. US yields will likely lead prices through year-end, with the 10y yield today hitting fresh multi-month pullback lows below 3.89%.
  • Focus for the rest of the Wednesday session lies on US existing home sales and the December consumer confidence. Bank of Canada minutes are set for release, while appearances from ECB's Lane, Fed's Goolsbee and Harker could draw attention.
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