Pound Sterling dives as UK inflation softens beyond estimates

• Pound Sterling tumbles below 1.3000 as UK inflation decelerated more than expected in June.
• Monthly headline United Kingdom inflation grew at a negligible pace in June.
• The burden of elevated inflation and higher interest rates by the BoE has spread from households to domestic firms.

The Pound Sterling (GBP) attracts significant offers as the United Kingdom’s June inflation report has turned out much softer than expected. The GBP/USD pair slipped swiftly below the psychological support of 1.3000 after the data release, and it is expected to deliver more weakness. The monthly headline Consumer Price Index (CPI) expanded at a negligible pace of 0.1% in June as households and firms face the burden of higher interest rates from the Bank of England (BoE).

Inflationary pressures in the United Kingdom eased more than what markets expected, supported by declining prices of goods and services at factory gates and aggressively restrictive monetary policy from BoE policymakers. However, investors are still cautious over whether UK Prime Minister Rishi Sunak would meet his promise of halving inflation by year-end ahead of a probable election in 2024.

Daily Digest Market Movers: Pound Sterling faces extreme pressure as inflation softens

• Pound Sterling dives as June’s Consumer Price Index has softened more than expected.
• United Kingdom’s Office for National Statistics has reported that monthly headline inflation expanded 0.1% in June, less than the 0.4% expected and the 0.9% advance seen in May.
• On an annual basis, headline CPI decelerated to 7.9% against the consensus of 8.2% and the 8.7% increase registered in May.
• Core inflation, a measure that excludes volatile food and oil prices, softened to 6.9% while investors were anticipating it to rise at a steady pace of 7.1%.
• Labor shortages and high food inflation have been major contributors to stubborn UK inflation.
• Meanwhile, UK’s grocery inflation has eased for a fourth straight month in June to 14.9%, till July 9, posting the steepest decline since its peak in March, Reuters report.
• In addition, a survey from Lloyds Bank showed that food inflation is expected to soften as producers have cut prices for the first time in more than three years as cost pressures have started to relent.
• Synergic effects from soft CPI and PPI are likely to ease the burden on households but are not sufficient to allow the Bank of England to go light on interest rates.
• Markets expect that the BoE will raise interest rates further by 100 basis points (bps) this year, implying an interest rate peak at around 6.5%.
• The burden of high inflation and higher interest rates by the BoE is widening its scope from households to domestic firms. UK’s insolvency services said England and Wales are on track for reporting the highest quarterly number of company insolvencies since early 2009 amid failure in repaying loans.
• The US Dollar Index (DXY) is making efforts to sustain above the psychological resistance of 100.00.
• The USD Index picked strength despite that United States Retail Sales growth failed to match expectations.
• US Retail Sales expanded 0.2% in June, lower than the 0.5% increase expected by markets.
• Softening US inflation, loosening labor market conditions, and moderating retail demand could prompt the Federal Reserve (Fed) to consider raising interest rates further only once this year.
• US Treasury Secretary Janet Yellen said on Tuesday that a cooling labor market is helping to slow inflation. Yellen also said on Monday that the economy is making good progress in returning inflation to 2% and she doesn’t expect the economy to fall into recession.

Technical Analysis: Pound Sterling skids below 1.3000

Pound Sterling cracks sharply below the psychological support of 1.3000 as inflationary pressures have slowed down beyond expectations. The Cable is declining towards the 20-day Exponential Moving Average (EMA), which is trading around 1.2860 as a mean-reversion move has been triggered. The asset has continued its three-day losing streak after printing a fresh annual high of 1.3140.