Pound Sterling slides after softer-than-expected UK inflation report

• The Pound Sterling weakens against the US Dollar after UK inflation came in slightly softer than anticipated.
• Easing UK price pressures gives more chances to subsequent interest-rate cuts by the BoE.
• Investors await the US CPI data for July.

The Pound Sterling (GBP) faces a sharp sell-off against its major peers in Wednesday’s London session. The British currency weakens as the United Kingdom (UK) Office for National Statistics (ONS) has reported a softer-than-expected Consumer Price Index (CPI) report for July, which has boosted expectations of sequential interest-rate cuts by the Bank of England (BoE).

Annual headline CPI rose by 2.2%, less than estimates of 2.3% but accelerating after returning to banks’ target of 2% both in May and June. In its forecasts, the BoE had already warned that the headline inflation could increase again after returning to 2%. Compared with the previous month, the CPI fell by 0.2%.

The core CPI, which excludes volatile items such as food, energy, alcohol and tobacco, decelerated at a faster-than-expected pace to 3.3% compared with the 3.4% expected and June’s figure of 3.5%. A sharp decline in core inflation was prompted by slower growth of service inflation, which has remained a major driving force to stick price pressures in the UK economy. Inflation in the service sector declined to 5.2% from the former release of 5.7%.

Price pressures in the service sector are majorly driven by high wage growth, which also fell to its lowest in two years in the three months ending June. The Employment report showed on Tuesday that Average Earnings Excluding Bonuses rose at a slower pace of 5.4% from 5.7% in the quarter ending May. A sheer decline in service inflation due to slower wage growth is expected to be a big relief for BoE policymakers, who have been worried that wage pressures couldn't be controlled in the near term.

On Monday, BoE's Monetary Policy Committee (MPC) member Catherine Mann warned about inflation remaining persistent. “Goods and services prices were set to rise again, and wage pressures in the economy could take years to dissipate,” Mann said.

Daily digest market movers: Pound Sterling drops against US Dollar ahead of US inflation

• The Pound Sterling slumps to near 1.2820 against the US Dollar (USD) in Wednesday’s European trading hours. The GBP/USD pair drops as the British currency weakens after the release of the UK’s soft inflation report. Meanwhile, the near-term outlook of the US Dollar is also uncertain ahead of the US CPI data for July, which will be published at 12:30 GMT.
• The US Dollar index (DXY), which tracks the Greenback’s value against six major currencies, edges higher to near 102.67 in Wednesday’s European session after correcting to a fresh weekly low at 102.55 on Tuesday.
• US annual headline and core inflation is expected to have decelerated by one-tenth to 2.9% and 3.2%, respectively, with monthly figures growing by 0.2%. The data inflation will significantly influence market expectations for Fed interest-rate cuts for the remainder of the year.
• The US Dollar recorded a sharp sell-off on Tuesday after a mostly soft Producer Price Index (PPI) report for July increased market expectations for the Federal Reserve (Fed) to start reducing interest rates more aggressively.
• According to the CME FedWatch tool, 30-day Federal Funds Futures pricing data shows that traders see a 54.5% chance that interest rates will be reduced by 50 basis points (bps) in September. The likelihood of a 50 bps rate reduction has slightly increased after the PPI report release, but is still significantly down from the 69% recorded a week ago.
• The PPI report showed that headline producer inflation came in at 2.2%, lower than estimates of 2.3% and June’s reading of 2.7%. In the same period, the core PPI grew at a slower pace of 2.4% from expectations of 2.7% and the former release of 3%. A sharp decline in the pricing power of owners at factory gates boosted confidence of investors that inflation is on track to return to the desired rate of 2%.

Technical Analysis: Pound Sterling drops from two-week high of 1.2870

The Pound Sterling slides to near 1.2820 against the US Dollar after posting a fresh two-week high at 1.2870. The near-term appeal of the GBP/USD pair is still firm as it holds the 20-day Exponential Moving Average (EMA), which trades around 1.2800.

Earlier, the Cable showed a sharp recovery from six-week low of 1.2665 after a positive divergence formation on a daily time frame, in which the pair continues to build higher lows while the momentum oscillator makes lower lows. This generally results in a resumption of the uptrend, but it should be confirmed with more indicators.

The 14-day Relative Strength Index (RSI) recovers after finding a cushion near 40.00, exhibiting signs of buying interest at lower levels.

On the upside, August 2 high at 1.2840 and the round-level resistance of 1.2900 will act as major resistances for the Pound Sterling. Alternatively, the recovery move could falter if the asset breaks below August 8 low at 1.2665. This would expose the asset to June 27 low at 1.2613, followed by April 29 high at 1.2570.