Pound Sterling drops as UK government turns to wage cuts to tame sticky inflation

• Pound Sterling has faced pressure as the UK government aims for wage cuts in public sector in the battle against persistent inflation.
• United Kingdom authority urges industry regulators to bring down profit margins and considers wage cuts.
• Bank of England kept doors open for further rate hikes as journey of achieving 2% inflation is far from over.

The Pound Sterling (GBP) has surrendered the majority of gains made after a recovery move as the United Kingdom’s government is looking to inculcate fiscal tools in the battle against stubborn inflation. The GBP/USD pair recovered after remaining well-supported near 1.2700, after the British administration announced new fiscal measures such as cutting wages of public sector employees. The British government also asked companies to bring down profit margins to tame sticky inflation, which might help trim fears of a bleak economic outlook.

Last week, hotter-than-expected headline United Kingdom’s headline inflation and fresh highs in the core Consumer Price Index (CPI) forced the Bank of England (BoE) to announce a fat rate hike of 50 basis points. Headline inflation remained higher than anticipation as upbeat sales of second-hand automobiles offset a decline in energy prices.

Daily digest market movers: Pound Sterling reacts to the vulnerable economic outlook

• United Kingdom’s economic outlook is in danger as BoE Governor Andrew Bailey raised interest rates surprisingly by 50 basis points (bps) to 5%.
• BoE policymakers were forced to announce massive rate hikes as United Kingdom inflation turned out to be more persistent than expected.
• United Kingdom’s headline inflation landed at 8.7% as rising prices for recreational cultural goods and services, air travel, and second-hand cars were sufficient to offset the marginal decline in historic high food inflation and falling gasoline prices.
• The core inflation is moving in the wrong direction, printed fresh highs at 7.1% despite consistent policy-tightening measures by the central bank.
• Last week, UK Retail Sales also beat expectations. Monthly economic data expanded by 0.3% while the street was anticipating a contraction by 0.2%. Annualized Retail Sales contracted by 2.1% but remained better as investors were hoping for a contraction of 2.6%.
• BoE Governor Andrew Bailey has kept doors open for further interest rate hikes as the journey of achieving price stability is far from over.
• More interest rate hikes by the BoE are expected to threaten economic outlooks adversely.
• The consequences of persistent UK inflation is the dampening image of the Conservative Party as Finance Minister Jeremy Hunt rolled back the promise of tax cuts, citing that its execution could propel inflationary pressures and offset the efforts yet made by the central bank to bring down inflation.
• The image of Britain’s Conservative Party could dampen further as UK FM Jeremy Hunt is in discussions with industry regulators that businesses must not raise profit margins, benefitting from upbeat demand, so-called greedflation, as reported by Bloomberg.
• In addition to greedflation, the UK government is stepping up efforts for taming inflation by cutting wages in the public sector.
• The broader market mood is demonstrating a risk-aversion theme as global equities are showing lofty valuations and the quarterly result season is at the doorstep.
• The US Dollar Index is rebounding after a corrective move as an interest rate hike in July by the Federal Reserve (Fed) is widely anticipated.
• Analysts at Rabobank expect the Fed to hike in July but also forecast a more moderate pace of rate hikes which would imply skipping September, with November being the meeting for a potential second hike.
• This week, investors will keep an eye on the United States Durable Goods Orders data, which is scheduled for Tuesday at 12:30 GMT.

Technical Analysis: Pound Sterling looks faces barricades around 1.2740

Pound Sterling has sensed immense pressure while attempting to cross the immediate resistance of 1.2740. The Cable is consistently getting decent support near the round-level support of 1.2700, however, efforts could be in vain as the US Dollar Index (DXY) is recovering from a corrective move.

The Pound Sterling is in a mean-reversion mode and is expected to find support near the 20-period daily Exponential Moving Average (DEMA). Downside bias in the Cable could strengthen if it fails to keep supported around 1.2700. While Pound Sterling bulls could come back in action if Cable climbs above 1.2800.