Pound Sterling retreats as victory against stubborn inflation still out of sight

• Pound Sterling attracts offers above 1.2950 and has resumed its downside journey.
• A decline in United Kingdom’s inflation has offered some relief to Bank of England policymakers.
• UK finance minister is confident of winning the battle against elevated inflation.

The Pound Sterling (GBP) has resumed its downside journey after meeting critical resistance above 1.2950. The GBP/USD pair has shifted into a bearish trajectory as investors hope that the Bank of England (BoE) won’t hike interest rates by a wide margin now since inflation has responded well to easing food prices offered by producers at factory gates.

However, the policy-tightening spell will continue as the United Kingdom’s current inflation is significantly higher than the desired rate. The UK central bank will announce the interest rate decision in August, and an interest rate hike of 25 basis points (bps) would push policy rates to 5.25%. 

Daily Digest Market Movers: Pound Sterling meets tough resistance as hawkish BoE bets trim

• Pound Sterling faces stiff resistance above 1.2950 as a journey towards 2% inflation is far from over.
• United Kingdom’s inflation softened in June beyond expectations but further quantitative tightening by the Bank of England cannot be ruled out.
• The monthly headline Consumer Price Index expanded at a nominal pace of 0.1% against the consensus of 0.4% and the former release of 0.9%.
• Annual headline inflation has decelerated significantly to 7.9% vs. the estimates of 8.2% and the prior release of 8.7%. Core CPI that excludes volatile food and oil prices has softened marginally to 6.9% from its fresh highs of 7.1%.
• Headline inflation at 7.9% is the lowest inflation figure in the past 15 months and the first downward surprise in the past five months.
• UK households get a sigh of relief as prices of goods at factory gates have softened dramatically. Producers are passing on the benefit of a decline in raw materials to end-consumers.
• The BoE has used policy tightening aggressively to ease inflationary pressures but has harmed the economic outlook.
• Easing inflationary pressures might motivate the BoE to raise interest rates by 25 bps only.
• Commenting on the inflation data, UK Finance Minister Jeremy Hunt is confident that he can win the battle against inflation. Hunt said, “We are seeing the first fruits of the difficult decision but a long way to go.”
• BoE Deputy Governor Dave Ramsden said on Monday the central bank should speed up the pace at which it is unwinding its 800-billion-Pound ($1 trillion) stockpile of government bonds bought as part of its quantitative easing operations, as reported by Reuters.
• About inflation, BoE Ramsden conveyed that the latest UK inflation data shows indicators of inflation persistence still a bit higher than BoE expected in May.
• The overall market mood is cautious as United States equities remained uncertain on Wednesday.
• The US Dollar Index (DXY) has rebounded after a corrective move as investors await the interest rate decision by the Federal Reserve (Fed) for its July meeting, which is scheduled for next week.
• A small interest rate hike of 25 bps is expected from the Fed, which will push interest rates to 5.25-5.50%.
• On Wednesday, US Census Bureau reported that construction of new single-family homes missed expectations. The economic data dropped to 1.44M vs. the expectations of 1.49M and the former release of 1.559M.
• In Thursday’s session, investors will focus on weekly Initial Jobless Claims data for the week ending July 14.

Technical Analysis: Pound Sterling continues four-day losing streak

Pound Sterling has continued its four-day losing streak. The Cable has witnessed immense selling pressure after failing to sustain the breakout of the Rising Channel chart pattern formed on a daily scale. The asset rebounded after sensing buying interest near the 20-day Exponential Moving Average (EMA) at around 1.2860 but has now resumed its downside journey. Upside momentum has faded but remains mostly still intact.