- Pound Sterling has slipped modestly as investors are awaiting key inflation data for a fresh trigger.
- United Kingdom’s inflation is set to remain sticky as labor shortages are still a major issue.
- Food price inflation is expected to decelerate to 9% by December.
Pound Sterling has sensed light profit booking after printing a fresh annual high at 1.3140. The GBP/USD pair will likely resume its north-side rally amid an absence of evidence that the United Kingdom’s inflation will cool down. To return inflation to 2%, the Bank of England (BoE) has already raised interest rates to 5% and further policy-tightening is in the pipeline.
United Kingdom’s labor market data missed estimates this week but wage pressures remained elevated as firms are offering higher salaries to bring fresh talent in-house considering labor shortages. No doubt, higher disposable income equipped with households would propel inflationary pressures, which would threaten the economic outlook. Investors will keep an eye on next week’s inflation data as a stubborn report could trigger fears of recession.
Daily Digest Market Movers: Pound Sterling displays non-directional performance
- Pound Sterling has dropped to near 1.3100 as the US Dollar Index (DXY) has attempted a recovery move after a five-day losing streak.
- After United Kingdom’s weak labor market report, rising wage pressures, and bleak factory activities, investors need guidance on interest rates peak from the Bank of England.
- UK’s employment data has demonstrated the burden of higher interest rates by the BoE this week despite the labor cost index maintaining strength.
- After the labor market and factory activity report, investors are shifting their focus toward the Consumer Price Index (CPI) data, which will release next week on Wednesday at 06:00 GMT.
- Investors should note that in May annual headline inflation rebounded to 8.7% and core CPI that excludes volatile oil and food prices printed a fresh high of 7.1%.
- Price pressures in the UK economy have not shown any evidence of softening despite BoE Governor Andrew Bailey having raised interest rates to 5%.
- Catalysts that have propelled severe inflation in the UK economy are labor shortages and significantly higher food inflation.
- Brexit event and early retirements by UK individuals are responsible for extreme labor shortages.
- Food price inflation in the Britain economy dropped to 18.3% in May from its 45-year high of 19.1 and has not peaked yet.
- UK’s Institute of Grocery Distribution has forecasted that food inflation will decelerate in the second half of the year and could drop to 9% by December.
- Re-hot inflation is threatening UK’s economic outlook and May’s Gross Domestic Product (GDP) contracted at a slower pace of 0.1% against the consensus of -0.3%.
- The burden on the UK economy could elevate as the BOE is set to raise interest rates further. Money markets are expecting that interest rates would peak around 6.5%.
- Overall market mood is upbeat as inflation in the United States has softened significantly, however, short-term uncertainty ahead of corporate earnings cannot be ruled out.
- America’s soft CPI and Producer Price Index (PPI) report for June month has elevated hopes of only one more interest rate hike from the Federal Reserve (Fed).
- The US economy is clearly in a disinflation process but has failed to turn Fed policymakers dovish.
- Fed Governor Christopher Waller is still confident that two more interest rate hikes are appropriate this year to bring down inflation to 2%.
Technical Analysis: Pound Sterling maintains rising channel breakout
Pound Sterling looks set to register the biggest weekly gains in the past eight months amid a cheerful market mood and expectations of more interest rate hikes by the Bank of England. The Cable has delivered a breakout of the Rising Channel chart pattern formed on a daily scale. A breakout of the aforementioned chart pattern indicates that the upside bias for the Pound Sterling is full of strength. Momentum oscillators are in a bullish trajectory, supporting more gains ahead.
BoE FAQs
The Bank of England (BoE) decides monetary policy for the United Kingdom. Its primary goal is to achieve ‘price stability’, or a steady inflation rate of 2%. Its tool for achieving this is via the adjustment of base lending rates. The BoE sets the rate at which it lends to commercial banks and banks lend to each other, determining the level of interest rates in the economy overall. This also impacts the value of the Pound Sterling (GBP).
When inflation is above the Bank of England’s target it responds by raising interest rates, making it more expensive for people and businesses to access credit. This is positive for the Pound Sterling because higher interest rates make the UK a more attractive place for global investors to park their money. When inflation falls below target, it is a sign economic growth is slowing, and the BoE will consider lowering interest rates to cheapen credit in the hope businesses will borrow to invest in growth-generating projects – a negative for the Pound Sterling.
In extreme situations, the Bank of England can enact a policy called Quantitative Easing (QE). QE is the process by which the BoE substantially increases the flow of credit in a stuck financial system. QE is a last resort policy when lowering interest rates will not achieve the necessary result. The process of QE involves the BoE printing money to buy assets – usually government or AAA-rated corporate bonds – from banks and other financial institutions. QE usually results in a weaker Pound Sterling.
Quantitative tightening (QT) is the reverse of QE, enacted when the economy is strengthening and inflation starts rising. Whilst in QE the Bank of England (BoE) purchases government and corporate bonds from financial institutions to encourage them to lend; in QT, the BoE stops buying more bonds, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive for the Pound Sterling.
Source: https://www.fxstreet.com/news/pound-sterling-faces-pressure-as-investors-shift-focus-to-inflation-report-for-interest-rate-guidance-202307140842