Pound Sterling jumps as robust consumer spending keeps core inflation sticky

• Pound Sterling starts moving as core inflation supports further policy tightening.
• UK’s core inflation remains stronger due to robust wage growth.
• More interest rate hikes from the BoE seem required so that inflation returns to 2%.

The Pound Sterling (GBP) is strengthening, inspired by persistently high core inflation data. The GBP/USD pair delivers a consolidation breakout as the Core Consumer Price Index (CPI) remains stable at 6.9%, higher than the forecast of 6.8%. Robust wage growth keeps consumer spending momentum intact and core price pressure near its immediate peak of 7.1%.

The United Kingdom’s stubborn core CPI is enough to force the Bank of England (BoE) to consider a continuation of the aggressive rate-tightening spell. The UK’s central bank has already raised interest rates to 5.25%, and now further policy tightening appears more likely. Meanwhile, headline inflation contracted in July as firms passed on the benefits of cheap oil prices to end consumers.

Daily Digest Market Movers: Pound Sterling rises as core inflation remains sticky

• Pound Sterling climbs above 1.2700 after mixed United Kingdom inflation data for July.
• Monthly headline inflation contracted by 0.4%, slower than expectations of 0.5%. In June, headline CPI expanded by 0.1%.
• Annual headline inflation softened to 6.8%, as expected by investors, versus. June’s reading of 7.8%. It seems that firms started passing the benefit of cheap oil on to end consumers.
• Core inflation that excludes volatile oil and food prices turned out persistent despite aggressive monetary policy by the Bank of England. The economic data remained sticky at 6.9% while investors forecasted a marginal decline to 6.8%.
• UK core inflation is marginally lower than its immediate peak of 7.1% and is sufficient to force BoE policymakers to raise interest rates further.
• Stubborn core inflation exposes BoE to raise interest rates to 6%.
• It seems that strong wage growth has elevated consumer spending due to higher disposable income.
• On Tuesday, the Pound Sterling was decently bought by market participants as robust wage growth offsets disappointing labor market data.
• April-June quarter’s Average Earnings Excluding Bonuses rose to 7.8% vs. a downwardly revised prediction of 7.4%. Earnings data including bonuses jumped significantly to 8.2% in the same period, considerably higher than the consensus of 7.3%.
• UK’s Office for National Statistics (ONS) reported that the labor market witnessed lay-offs of 66K in June while Reuters forecasted fresh additions of 75K job seekers. In May, the ONS agency reported an increase in new payrolls by 102K.
• Claimant Count Change for July rose sharply by 29K, higher than the 16.2K jobless claims recorded in June. On the contrary, investors forecasted a decline in the number of claims by 7.3K.
• The second-quarter Unemployment Rate rose to 4.2% vs. the estimates and the former release of 4.0%.
• Assessing the UK jobs report, UK Minister for Employment, Guy Opperman MP told FXStreet: "Our jobs market continues to show its strength with employment at near record levels and inactivity down by over 300,000 since the pandemic peak. Combined with falling inflation and our package of reforms to remove barriers to work, we are on the right path to drive down household costs and grow our economy."
• The US Dollar Index (DXY) struggles to sustain above 103.00 as the Federal Reserve (Fed) is expected to keep interest rates unchanged in September’s monetary policy meeting.
• Per the CME FedWatch Tool, less than 10% chances are in favor of a 25 basis point (bp) interest-rate hike in September’s policy meeting.
• The US Dollar remained sideways on Tuesday despite robust consumer spending momentum in July, reported by the US Census Bureau.
• The economic data rose by 0.7% vs. expectations of 0.4% and the former release of 0.2% amid higher disposable income due to sustained wage growth.
• Minneapolis Fed President Neel Kashkari on Tuesday said that while the US central bank has made some progress in its inflation fight, interest rates may still need to go higher to finish the job.

Technical Analysis: Pound Sterling seems confident above 1.2700

The Pound Sterling rose sharply after the UK’s core inflation remained high in July. The Cable seems confident above the round-level resistance of 1.2700 and is expected to test the three-day high around 1.2750. The asset has recovered to near the 50-day Exponential Moving Average (EMA) around 1.2740 but is still trading below the 20-day EMA.

The Relative Strength Index (RSI) (14) has dropped to near 40.00. This would be a make-or-break level for the momentum oscillator as a slippage below the same will activate the bearish impulse.