• Pound Sterling faces a sharp sell-off as the UK Q4 GDP contracted by 0.3%.
• The BoE may consider aggressive rate cuts due to easing inflation, slowing wage growth and poor economic outlook.
• The US Dollar corrects as investors digest the Fed’s hawkish narrative.

The Pound Sterling (GBP) falls back in Thursday’s early European session as the United Kingdom economy enters into a technical recession. The preliminary Gross Domestic Product (GDP) data from the UK Office for National Statistics (ONS) shows that the economy contracted by 0.3% in the fourth quarter. This means the UK economy has contracted for the second straight quarter in a row – the definition of a technical recession. The data could also ignite expectations of early rate cuts by the Bank of England (BoE), who may be keen to introduce growth-stimulating policies.

The broader appeal for the Pound Sterling has weakened as majority of economic indicators apart from the economic contraction are pointing to aggressive rate cuts by the BoE to avoid further contraction. The Pound Sterling tends to face foreign outflows when expectations for the BoE turning dovish escalate.

The consumer price inflation remained steady in January while investors forecasted it to accelerate further. Also, BoE Governor Andrew Bailey sees price pressures taming to the required target by Spring.

While wage growth and service inflation are still skewed to the upside and therefore unlikely to bring inflation down to the 2% target, the moderate decline in wage growth momentum is clearly visible.

Meanwhile, the US Dollar has faced some backfilling after a sharp rally inspired by cooling expectations of early rate cuts by the Federal Reserve (Fed). Investors now expect the Fed to hold interest rates unchanged in the range of 5.25%-5.50% till June monetary policy meeting.