Pound Sterling recovers further as BoE keeps doors open for further policy tightening

• Pound Sterling aims to continue recovery as the BoE eyes further policy-tightening.
• Andrew Bailey assured that inflation in the United Kingdom will soften to 5% in October.
• One-year forward UK consumer inflation expectations and wage growth slow down swiftly.

The Pound Sterling (GBP) attempts to sustain above 1.2700, capitalizing on the recovery move, as the market mood starts reviving and the Bank of England (BoE) delivers a hawkish interest rate decision. The GBP/USD pair eyes more gains as the BoE raises interest rates by 25 basis points (bps) to 5.25%, the highest in the past 15 years. The central bank leaves the door open for further policy tightening as inflation is extremely far from the desired rate of 2%.

Andrew Bailey assured that inflation in the United Kingdom will soften to 5% in October as food inflation appeared to be peaking now. While stubborn service inflation could keep persistence in inflation ahead. Meanwhile, an aggressive rate-tightening cycle by the central bank deepens fears of recession as the housing sector and factory activities would face more heat.

Daily Digest Market Movers: Pound Sterling capitalizes on hawkish BoE policy

• Pound Sterling manages to sustain above 1.2700 after a decent recovery as the risk appetite of market participants improves and Bank of England Governor Andrew Bailey leaves the door open for further policy tightening.
• On Thursday, the BoE raised interest rates by 25 bps to 5.25% to build more pressure on stubborn inflation. This was the 14th consecutive interest-rate hike.
• Out of the nine-member Monetary Policy Committee (MPC), BoE policymaker Swati Dhingra favored a steady interest rate policy. BoE's Haskel and Mann supported a 50 bps interest rate hike.
• Andrew Bailey said that the option of a 50 bps interest-rate hike was not in the picture and the central bank will keep interest rates “sufficiently restrictive for a sufficient period” so that inflation returns swiftly to 2%.
• In his support, BoE Deputy Governor Ben Broadbent said keeping relatively high rates over an extended period was the key to cutting inflation.
• Regarding the inflation outlook, Andrew Bailey is of the view that inflation will come down to 5% by October.
• UK Finance Minister Jeremy Hunt said it is encouraging that the BoE thinks UK PM Rishi Sunak will meet his pledge to halve inflation.
• Also, a survey from Citi/YouGov showed that 12-month forward consumer inflation expectations dropped sharply to 4.3% vs. former expectations of 5.0%.
• Major catalysts behind elevated United Kingdom inflation are labor shortages and sticky food inflation.
• Andrew Bailey is of the view that food and drink inflation appears to have peaked while continued strength in services price inflation may suggest that high inflation will persist.
• Decision Maker Panel survey conducted on July 7-21 showed that prices charged and wage distribution by businesses would slow down ahead. One-year forward wage growth is seen decreasing to 5.0% in July from 5.3% in June.
• Risk-aversion theme loses strength as investors digest Fitch’s downgrade to the United States government's long-term debt rating.
• The US Dollar Index (DXY) witnesses correction after facing stiff barricades around 102.80 as investors remain cautious ahead of the US Nonfarm Payrolls (NFP) data.
• On Thursday, the US Dollar delivered a power-pack action as the Services PMI failed to match expectations and labor cost growth eased beyond expectations.
• While Factor Orders outperformed expectations and May’s reading, indicating a recovery in Manufacturing PMI.
• Regarding Federal Reserve (Fed) interest rate guidance, Atlanta Fed Bank President Raphael Bostic thinks an interest rate hike in September is no longer required.

Technical Analysis: Pound Sterling forms Hammer candlestick pattern

Pound Sterling bounces back swiftly after sensing decent buying interest near the round-level support of 1.2600. The Cable forms a Hammer candlestick pattern on Thursday that signifies strong interest from buyers considering the asset a value bet. The major still trades below the 20 and 50-day Exponential Moving Averages (EMAs), which indicates that the short and medium-term trend is bearish. The Cable struggles to return to the Rising Channel chart pattern formed on the daily chart.