Pound Sterling falls sharply as inflation softens despite recovery in energy prices

• Pound Sterling faces a sell-off as inflation remains soft while investors anticipated sticky prices.
• The UK’s poor demand outlook dampens wage growth.
• Ample volatility should remain in the Pound Sterling as the BoE will announce its monetary policy on Thursday.

The Pound Sterling (GBP) attracted significant offers after the UK’s Consumer Price Index (CPI) report for August turned out soft while investors projected a persistent one due to a recovery in energy prices. The GBP/USD pair weakened as core inflation decelerated significantly, portraying a slowdown in demand for non-durable goods. UK’s Producer Price Index (PPI) for core output contracted in August, which indicates that producers lost confidence in the demand outlook as high inflation bit households’ real income.

Ample volatility would remain in the Pound Sterling as the inflation data will be followed by the interest rate decision from the Bank of England (BoE). After a soft inflation report, BoE policymakers might announce the interest rate peak sooner but should remain on course to hike interest rates for the 15th straight time on Thursday. An interest rate hike by 25 basis points (bps) will push rates to 5.50%, which will equalize policy divergence with the Federal Reserve (Fed).

Daily Digest Market Movers: Pound Sterling faces an intense sell-off on soft inflation report

• Pound Sterling dropped vertically, printing a fresh three-month low at 1.2330 on the soft inflation report for August.
• The UK’s monthly headline inflation expanded at a slower pace of 0.3%, while investors anticipated it accelerating at a pace of 0.7%. In July, the economic data contracted by 0.4%.
• The annual headline CPI softened to 6.7% vs. July’s reading of 6.8%. Investors forecasted the economic data to accelerate to 7.1%.
• UK headline inflation decelerated in July despite higher energy prices. The annual core CPI that excludes volatile food and oil prices softened significantly to 6.2% against the estimates of 6.8% and the 6.9% figure recorded in July.
• The PPI for core output contracted by 0.1% in August on a monthly basis, indicating firms reduced prices at factory gates amid a deteriorating demand environment.
• The UK’s soft inflation report is expected to allow Bank of England policymakers to announce an interest rate peak sooner, but one more interest rate increase in September, with the meeting scheduled for Thursday, cannot be ruled out.
• This would be the 15th straight interest rate hike by the BoE in which the central bank is expected to raise interest rates by 25 basis points (bps) to 5.50%.
• In spite of a softer-than-anticipated inflation report, inflation in the UK economy is highest in comparison with other G7 economies.
• OECD projected on Tuesday that Britain remains on course to have the highest inflation of leading rich economies in 2023 but sees softening to 2.9% in 2024.
• BoE Deputy Governor Sam Woods warned on Tuesday that higher interest rates have brought an uptick in impairments within the banking sector. The situation is not alarming, and authorities are monitoring it to avoid any calamity.
• Meanwhile, the consequences of higher interest rates start hitting wage growth. XpertHR reported that wage growth fell to a median 5% in the three months to the end of August from a 5.4% rise in the quarter ending in July.
• Sheila Attwood, XpertHR's senior content manager, said, “For the remainder of the year, we can expect settlements and increases in pay to slowly begin to fall."
• The US Dollar turns sideways after a V-shape recovery above the crucial resistance of 105.00 as investors remain cautious about the Fed’s monetary policy, which will be announced in the late New York session.
• The Fed is expected to keep interest rates unchanged at 5.25% to 5.50% as inflation has been softening consistently while labor growth remains steady.
• Investors will focus on the interest rate guidance for the remaining year as strong discussions about one more interest rate hike this year could elevate the risks of an economic slowdown.
• The recent rise in energy prices has exerted pressure on inflation, which could force Fed policymakers to maintain the spotlight on one more interest rate increase.

Technical Analysis: Pound Sterling refreshes three-month low near 1.2350

The Pound Sterling refreshes its three-month low after the UK inflation report for August turned out softer. The Cable is on a bearish trajectory, trading below the 50 and 200-day Exponential Moving Averages (EMAs). The asset is expected to discover interim support near the May 25 low of around 1.2300. Momentum oscillators indicate that the bearish impulse has strengthened further.