Pound Sterling holds onto gains despite sticky US CPI report and dismal UK outlook

• Pound Sterling attracted significant offers as UK factory activities contracted sharply.
• Lay-offs in the UK labor market, higher wage growth, and weak factory activities elevate troubles for BoE policymakers.
• BoE Breeden warned that risks to inflation are skewed to the upside.

The Pound Sterling (GBP) rebounds strongly as the US Dollar comes under pressure after a slightly hotter-than-expected US inflation report. Earlier, the Pound Sterling remained offered as the UK’s Office for National Statistics (ONS) reported that the economy shrank by 0.5% in July and factory activities contracted significantly due to a deteriorating demand outlook. The GBP/USD pair witnessed an intense sell-off as higher interest rates by the Bank of England (BoE) triggered an economic slowdown and firms remain reluctant to full-capacity utilization.

After significant layoffs and weak factory activities in July, it is evident that the UK economy is failing to absorb the burden of restrictive monetary policy. Meanwhile, strong wage momentum has boosted upside risks to inflation and warrants more interest rate hikes from the BoE to contain the highest inflation among G7 economies. Sarah Breeden, who will replace the BoE’s Jon Cunliffe for Deputy Governor in November, also said that risks to inflation are skewed to the upside.

Daily Digest Market Movers: Pound Sterling recovers despite mixed market mood

• Pound Sterling dropped vertically as UK factory activities contracted in July, demonstrating repercussions of higher interest rates by the Bank of England.
• UK’s ONS reported that monthly Industrial Production contracted by 0.7%, which was a higher pace than expectations of 0.6%. In June, the economic indicator expanded by 1.8%.
• Monthly Manufacturing Production contracted by 0.8%, while investors anticipated a contraction of 1.0%. In the same period a month ago, the economic data expanded by 2.4%.
• The Gross Domestic Product (GDP) data shrank by 0.5% on a monthly basis vs. an expansion of 0.5% in June. Investors anticipated a contraction of 0.2%.
• Goods Trade Balance remained below the estimates and the prior release, which indicates that traded volume was due to the dismal economic outlook.
• On Tuesday, the labor market report for August indicated that wage growth momentum remained strong while lay-offs exceeded hiring numbers as UK firms remained worried about a deteriorating demand environment.
• UK employers shed 207K jobs in the three months to July, more than the 185K decline forecasted by markets.  In the three months to June, the labor market lost 66K payrolls.
• The Unemployment Rate for the quarter ending in July rose to 4.3%, as anticipated by market participants, from the prior reading of 4.2%.
• Average Earnings excluding bonuses in the three months to July landed at 7.8%, in line with estimates and the former release. Wage growth data including bonuses rose to 8.5% against projections and the former release of 8.2%.
• The labor market report accelerated uncertainty over the interest rate outlook as strong wage growth could force BoE policymakers to discuss increasing rates, though bleak labor demand could be a limiting factor for more interest rate hikes.
• Sarah Breeden, who will replace BoE Deputy Governor Jon Cunliffe in November, thinks risks to inflation are skewed to the upside. She forecasted the achievement of price stability in two years.
• For the September monetary policy, investors expect that the BoE will raise interest rates consecutively for the 15th time. An interest rate increase of 25 basis points (bps) is highly anticipated, which will push interest rates to 5.50%.
• The US Dollar Index (DXY) dropped sharply despite the August inflation report remaining persistent. Headline inflation expanded at a 0.6% pace as projected due to a sharp recovery in gasoline prices. Core Consumer Price Index (CPI) grew by 0.3%, at a higher pace than the estimate and the former reading of 0.2%.
• On an annual basis, headline CPI accelerated to 3.7% while core inflation decelerated to 4.3% as anticipated.
• From May, global oil prices have gained as much as 40%, which has boosted gasoline prices and elevated the burden on households by squeezing their real income. This could add to troubles for Federal Reserve (Fed) policymakers and force them to raise interest rates one more time this year.

Technical Analysis: Pound Sterling recovers to near 1.2500

Pound Sterling prints a nearly three-month low around 1.2450 as UK economic activities remained vulnerable in July. The Cable faces an intense sell-off and is exposed to more downside. The major trades below the 200-day Exponential Moving Average (EMA) are around 1.2500. The short-term trend is bearish as the 20 and 50-day EMAs are downward-sloping, and momentum oscillators portray strength in the bearish impulse.