Market news
17.07.2024, 07:02

Pound Sterling strengthens as stubborn UK inflation dampens BoE rate-cut bets for August

  • The Pound Sterling flexes muscles against its major peers as the UK CPI report for June turned out sticky.
  • UK service inflation, a key metric for BoE policymakers for decision-making on interest rates, rose steadily to 5.7%.
  • Better-than-expected US Retail Sales report for June failed to impact firm Fed rate-cut bets.

The Pound Sterling (GBP) exhibits strength in Wednesday’s London session as the United Kingdom (UK) Office for National Statistics (ONS) has reported stubborn Consumer Price Index (CPI) data for June.

The CPI report showed that annual headline and core inflation, which excludes volatile food and energy items, rose steadily to 2.0% and 3.5%, respectively. Inflation in the service sector, which has remained a key factor in refraining Bank of England (BoE) policymakers from favoring a move to policy normalization, has remained sticky at 5.7%. On month, the headline inflation rose at a slower pace of 0.1%, as expected, from May’s reading of 0.3%.

BoE officials will likely hesitate to support the unwinding of the restrictive monetary policy stance due to sticky price pressures. Policymakers have been showing concerns about stubborn inflationary pressures in the service sector.

A stubborn UK CPI report would also diminish market speculation that the BoE will start reducing interest rates from the August meeting.

The next trigger for the Pound Sterling will be the employment data for the three-months ending in May. Economists expect the ILO Unemployment Rate to remain steady at 4.4%. The Average Earnings data, both Including and Excluding bonuses, a key measure of wage growth, is expected to have decelerated to 5.7%. Signs of easing wage growth momentum would be favorable for market expectations of BoE rate cuts.

Daily digest market movers: Pound Sterling grips gains against US Dollar, UK employment in focus

  • The Pound Sterling holds strength against the US Dollar (USD) near the psychological resistance of 1.3000. The US Dollar remains on the back foot even though the United States (US) Census Bureau reported better-than-expected Retail Sales data for June on Tuesday.
  • Monthly Retail Sales remained unchanged, as expected, as higher receipts for core goods offset weak demand for automobiles. Also, May’s reading was revised higher to 0.3% from 0.1%. The Retail Sales data has slightly improved the economic outlook but cannot weigh on firm market speculation that the Federal Reserve (Fed) will start reducing interest rates from the September meeting.
  • According to the CME FedWatch tool, 30-day Federal Funds futures pricing data shows that an interest rate cut in September is a done deal. The tool also shows that traders have priced in two or three rate cuts this year against one forecasted by Fed officials in the latest dot plot.
  • Higher expectations for Fed rate cuts in September were boosted by the softer-than-expected CPI report for June, which signaled that the disinflation process resumed in the second quarter after stalling in the first one. Also, easing labor market conditions fuelled rate-cut prospects.

Technical Analysis: Pound Sterling gathers strength to break above 1.3000

The Pound Sterling clings to gains near 1.3000 against the US Dollar. The near-term outlook of the GBP/USD pair has strengthened as it holds the key support of the March 8 high near 1.2900, which used to be a resistance. The major is expected to extend its upside towards a two-year high near 1.3140.

All short-to-long-term Exponential Moving Averages (EMAs) are sloping higher, suggesting a strong bullish trend.

The 14-period Relative Strength Index (RSI) jumps to near 70.00 for the first time in more than a year, indicating a strong momentum towards the upside.

Pound Sterling FAQs

The Pound Sterling (GBP) is the oldest currency in the world (886 AD) and the official currency of the United Kingdom. It is the fourth most traded unit for foreign exchange (FX) in the world, accounting for 12% of all transactions, averaging $630 billion a day, according to 2022 data. Its key trading pairs are GBP/USD, aka ‘Cable’, which accounts for 11% of FX, GBP/JPY, or the ‘Dragon’ as it is known by traders (3%), and EUR/GBP (2%). The Pound Sterling is issued by the Bank of England (BoE).

The single most important factor influencing the value of the Pound Sterling is monetary policy decided by the Bank of England. The BoE bases its decisions on whether it has achieved its primary goal of “price stability” – a steady inflation rate of around 2%. Its primary tool for achieving this is the adjustment of interest rates. When inflation is too high, the BoE will try to rein it in by raising interest rates, making it more expensive for people and businesses to access credit. This is generally positive for GBP, as higher interest rates make the UK a more attractive place for global investors to park their money. When inflation falls too low it is a sign economic growth is slowing. In this scenario, the BoE will consider lowering interest rates to cheapen credit so businesses will borrow more to invest in growth-generating projects.

Data releases gauge the health of the economy and can impact the value of the Pound Sterling. Indicators such as GDP, Manufacturing and Services PMIs, and employment can all influence the direction of the GBP. A strong economy is good for Sterling. Not only does it attract more foreign investment but it may encourage the BoE to put up interest rates, which will directly strengthen GBP. Otherwise, if economic data is weak, the Pound Sterling is likely to fall.

Another significant data release for the Pound Sterling is the Trade Balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports over a given period. If a country produces highly sought-after exports, its currency will benefit purely from the extra demand created from foreign buyers seeking to purchase these goods. Therefore, a positive net Trade Balance strengthens a currency and vice versa for a negative balance.

 

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