Pound Sterling volatility spikes as UK inflation stays high, supports big rate hike

• Pound Sterling is displaying volatile moves as UK inflation has accelerated.
• Higher United Kingdom price pressures are going to propel the need for bulk rate hikes from the Bank of England.
• UK firms have been offering higher wages to offset supply shortage vs. excess demand deviation.

The Pound Sterling (GBP) is experiencing wild moves after United Kingdom inflation for May has turned out to be more persistent than expected. The GBP/USD pair might attract buyers as surprisingly higher inflationary pressures in Britain will propel the need for bulky hikes in the interest rates by the Bank of England (BoE).

Tight labor market conditions in the United Kingdom have fueled inflationary pressures. Households demand has remained elevated as higher earnings provided the luxury of having more disposable individuals.  Fears of bigger interest rate hikes by the UK central bank have accelerated, which might scale down the deviation of the Federal Reserve’s higher interest rates significantly. The Pound Sterling is bound to stay bullish versus the US Dollar while this central bank discrepancy continues.

Daily digest market movers: Pound Sterling gains traction as UK inflation soars

• UK inflation figures have surprisingly landed higher than expectations and have propelled chances of a 50 basis point interest rate hike by the Bank of England on Thursday.
• The monthly headline Consumer Price Index (CPI) for May expanded at a pace of 0.7%, matched April’s pace but remained higher than the estimated speed of 0.5%.
• Annualized headline inflation remained steady at 8.7% while the market was anticipating a deceleration to 8.4%.
• Core UK CPI that excludes oil and food prices has accelerated to 7.1% versus the consensus and the former release of 6.8%.
• A quarterly survey done by the Bank of England shows that consumer inflation expectations for the coming 12 months have softened to 3.5% in May against the prior release of 3.9% being recorded in February, while five-year inflation expectations remained steady at 3.0%.
• BoE Governor Andrew Bailey said last week that inflation will come down, but it will take longer than expected while speaking before the House of Lords Economic Affairs Committee.
• Shortages of labor due to Brexit, early retirement, and the 45-year high food price index have remained major contributors to persistence in UK inflation.
• BoE policymaker Catherine Mann said last week that wage increases of 4.0% would be a challenge to returning CPI to 2.0%.”
• UK firms have been offering higher wages to offset the deviation between excess demand and supply shortage of labor.
• Reuters reported that human resources data firm XpertHR said the median basic pay settlement in the three months to the end of May remained at 6%, keeping pressure on the central bank for raising interest rates further.
• The US Dollar Index has remained inside the woods ahead of Federal Reserve (Fed) Chair Jerome Powell’s testimony to the US Congress on Wednesday.
• Investors would like to see whether Jerome Powell would stand on guidance already delivered as the street is anticipating only one rate hike by year-end while the central bank guided two more interest rates.
• As per the CME Fedwatch tool, more than 50% chances are in favor of only one interest rate hike from the Fed by year-end.
• The overall risk profile is showing caution as Wall Street Journal (WSJ) reported that China is planning military training facility in Cuba, to which US Secretary of State Antony Blinken has shown deeper concerns.
• Federal Reserve board member Lisa Cook and vice chair Philip Jefferson have backed taming sticky inflation.

Technical Analysis: Pound Sterling aims to recapture its annual high at 1.2850

The Pound Sterling has rebounded moderately after correcting to near the crucial support of 1.2700. The Cable is consistently approaching north in a Rising Channel chart pattern in which each pullback is considered a buying opportunity by the market participants. Sentiment for Cable is extremely bullish as short-to-long-term Exponential Moving Averages (EMAs) are upward-sloping. Also, momentum oscillators are oscillating in the bullish range supporting range extension.

Bullish bias for the Cable would strengthen if it manages to climb above the fresh annual high around 1.2850.  The upside momentum could exhaust if Cable drops below the previous month’s high around 1.2669.