Pound Sterling strengthens as stubborn UK inflation dampens BoE rate-cut bets for August

• The Pound Sterling flexes muscles against its major peers as the UK CPI report for June turned out sticky.
• UK service inflation, a key metric for BoE policymakers for decision-making on interest rates, rose steadily to 5.7%.
• Better-than-expected US Retail Sales report for June failed to impact firm Fed rate-cut bets.

The Pound Sterling (GBP) exhibits strength in Wednesday’s London session as the United Kingdom (UK) Office for National Statistics (ONS) has reported stubborn Consumer Price Index (CPI) data for June.

The CPI report showed that annual headline and core inflation, which excludes volatile food and energy items, rose steadily to 2.0% and 3.5%, respectively. Inflation in the service sector, which has remained a key factor in refraining Bank of England (BoE) policymakers from favoring a move to policy normalization, has remained sticky at 5.7%. On month, the headline inflation rose at a slower pace of 0.1%, as expected, from May’s reading of 0.3%.

BoE officials will likely hesitate to support the unwinding of the restrictive monetary policy stance due to sticky price pressures. Policymakers have been showing concerns about stubborn inflationary pressures in the service sector.

A stubborn UK CPI report would also diminish market speculation that the BoE will start reducing interest rates from the August meeting.

The next trigger for the Pound Sterling will be the employment data for the three-months ending in May. Economists expect the ILO Unemployment Rate to remain steady at 4.4%. The Average Earnings data, both Including and Excluding bonuses, a key measure of wage growth, is expected to have decelerated to 5.7%. Signs of easing wage growth momentum would be favorable for market expectations of BoE rate cuts.

Daily digest market movers: Pound Sterling grips gains against US Dollar, UK employment in focus

• The Pound Sterling holds strength against the US Dollar (USD) near the psychological resistance of 1.3000. The US Dollar remains on the back foot even though the United States (US) Census Bureau reported better-than-expected Retail Sales data for June on Tuesday.
• Monthly Retail Sales remained unchanged, as expected, as higher receipts for core goods offset weak demand for automobiles. Also, May’s reading was revised higher to 0.3% from 0.1%. The Retail Sales data has slightly improved the economic outlook but cannot weigh on firm market speculation that the Federal Reserve (Fed) will start reducing interest rates from the September meeting.
• According to the CME FedWatch tool, 30-day Federal Funds futures pricing data shows that an interest rate cut in September is a done deal. The tool also shows that traders have priced in two or three rate cuts this year against one forecasted by Fed officials in the latest dot plot.
• Higher expectations for Fed rate cuts in September were boosted by the softer-than-expected CPI report for June, which signaled that the disinflation process resumed in the second quarter after stalling in the first one. Also, easing labor market conditions fuelled rate-cut prospects.

Technical Analysis: Pound Sterling gathers strength to break above 1.3000

The Pound Sterling clings to gains near 1.3000 against the US Dollar. The near-term outlook of the GBP/USD pair has strengthened as it holds the key support of the March 8 high near 1.2900, which used to be a resistance. The major is expected to extend its upside towards a two-year high near 1.3140.

All short-to-long-term Exponential Moving Averages (EMAs) are sloping higher, suggesting a strong bullish trend.

The 14-period Relative Strength Index (RSI) jumps to near 70.00 for the first time in more than a year, indicating a strong momentum towards the upside.