Pound Sterling faces pressure as investors shift focus to inflation report for interest rate guidance

• Pound Sterling has slipped modestly as investors are awaiting key inflation data for a fresh trigger.
• United Kingdom’s inflation is set to remain sticky as labor shortages are still a major issue.
• Food price inflation is expected to decelerate to 9% by December.

Pound Sterling has sensed light profit booking after printing a fresh annual high at 1.3140. The GBP/USD pair will likely resume its north-side rally amid an absence of evidence that the United Kingdom’s inflation will cool down. To return inflation to 2%, the Bank of England (BoE) has already raised interest rates to 5% and further policy-tightening is in the pipeline.

United Kingdom’s labor market data missed estimates this week but wage pressures remained elevated as firms are offering higher salaries to bring fresh talent in-house considering labor shortages. No doubt, higher disposable income equipped with households would propel inflationary pressures, which would threaten the economic outlook. Investors will keep an eye on next week’s inflation data as a stubborn report could trigger fears of recession.

Daily Digest Market Movers: Pound Sterling senses pressure as risk appetite eases

• Pound Sterling has dropped to near 1.3100 as the US Dollar Index (DXY) has attempted a recovery move after a five-day losing streak.
• After United Kingdom’s weak labor market report, rising wage pressures, and bleak factory activities, investors need guidance on interest rates peak from the Bank of England.
• UK’s employment data has demonstrated the burden of higher interest rates by the BoE this week despite the labor cost index maintaining strength.
• After the labor market and factory activity report, investors are shifting their focus toward the Consumer Price Index (CPI) data, which will release next week on Wednesday at 06:00 GMT.
• Investors should note that in May annual headline inflation rebounded to 8.7% and core CPI that excludes volatile oil and food prices printed a fresh high of 7.1%.
• Price pressures in the UK economy have not shown any evidence of softening despite BoE Governor Andrew Bailey having raised interest rates to 5%.
• Catalysts that have propelled severe inflation in the UK economy are labor shortages and significantly higher food inflation.
• Brexit event and early retirements by UK individuals are responsible for extreme labor shortages.
• Food price inflation in the Britain economy dropped to 18.3% in May from its 45-year high of 19.1 and has not peaked yet.
• UK’s Institute of Grocery Distribution has forecasted that food inflation will decelerate in the second half of the year and could drop to 9% by December.
• Re-hot inflation is threatening UK’s economic outlook and May’s Gross Domestic Product (GDP) contracted at a slower pace of 0.1% against the consensus of -0.3%.
• The burden on the UK economy could elevate as the BOE is set to raise interest rates further. Money markets are expecting that interest rates would peak around 6.5%.
• Overall market mood is upbeat as inflation in the United States has softened significantly, however, short-term uncertainty ahead of corporate earnings cannot be ruled out.
• America’s soft CPI and Producer Price Index (PPI) report for June month has elevated hopes of only one more interest rate hike from the Federal Reserve (Fed).
• The US economy is clearly in a disinflation process but has failed to turn Fed policymakers dovish.
• Fed Governor Christopher Waller is still confident that two more interest rate hikes are appropriate this year to bring down inflation to 2%.

Technical Analysis: Pound Sterling delivers a Rising Channel breakout

Pound Sterling looks set to register the biggest weekly gains in the past eight months amid a cheerful market mood and expectations of more interest rate hikes by the Bank of England.  The Cable has delivered a breakout of the Rising Channel chart pattern formed on a daily scale. A breakout of the aforementioned chart pattern indicates that the upside bias for the Pound Sterling is full of strength. Momentum oscillators are in a bullish trajectory, supporting more gains ahead.