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Pound bounces ahead of inflation data, USD slides

  • The British Pound shows signs of further breakout ahead of August UK inflation data.
  • UK headline inflation accelerates due to rising energy prices.
  • Uncertainty is growing over Prime Minister Sunak’s delivery of his promise to halve headline inflation to 5% by the end of the year.

The British pound (GBP) is trying to recover even as investors remain uncertain about the UK’s economic outlook. Expectations are rife of a further increase in interest rates by the Bank of England (BoE), a decision to be announced on Thursday. The BoE is in no position to pause its policy tightening as inflationary pressure is tenacious and wage growth momentum is strong.

Ahead of the BoE’s interest rate decision, investors will be closely watching inflation data due on Wednesday. The headline Consumer Price Index (CPI) is expected to accelerate due to rising energy prices as global oil prices have rebounded over the past four months. Core inflation will remain practically stable due to the increase in the labor cost index. Market participants appear to doubt that British Prime Minister Rishi Sunak will deliver on his promise to halve headline inflation to 5% by the end of the year. Sunak promised to reduce inflation to 5% when headline inflation was in double digits in January.

Daily summary of market movements: The Pound recovers while awaiting inflation data

  • The British Pound finds support near 1.2370 ahead of UK inflation data for August, due on Wednesday at 06:00 GMT.
  • Headline inflation is expected to continue rising as global oil prices have seen a recovery of more than 40% in the past four months.
  • According to estimates, the monthly headline CPI expanded at a stronger pace of 0.7% despite the 0.4% contraction in July. Annual headline inflation is expected to accelerate to 7.1%, up from 6.8% in July.
  • The annualized core CPI, which excludes oil and food price volatility, would decline slightly to 6.8%, down from 6.9% in July. Investors remain concerned about high underlying inflation, driven by stronger wage growth.
  • Bank of England policymakers generally take core inflation into account when considering monetary policy, but a higher headline CPI could pose problems for them as household incomes would be reduced due to greater out-of-pocket spending on gasoline and energy components.
  • August inflation data will be followed by the BoE’s interest rate decision, which will be announced on Thursday.
  • According to a Reuters poll, the BoE will raise interest rates by 25 basis points (bp), to 5.5%, in its next monetary decision, scheduled for September 21.
  • Aside from the interest rate decision in September, investors want to know whether the BoE will raise interest rates in November or wait to assess the impact of current policy rates before making a decision.
  • Citigroup now predicts that the BoE will pause rate hikes in November, in contrast to the 25 basis point hike previously forecast.
  • Further interest rate hikes by the central bank would increase their impact on the manufacturing sector and job growth. The British Chamber of Commerce (BCC) reported on Monday that 46% of businesses surveyed said the rate rise so far was having a negative impact, while 45% said they had not been directly affected.
  • The market mood remains cautious in the US, awaiting the monetary policy decision of the Federal Reserve (Fed), which will be announced on Wednesday. The Fed is expected to keep rates unchanged as inflation is falling and the economy remains resilient.
  • It will be exciting to see if the Fed manages to set the economy on a path of easing inflation with the economic outlook only slightly diminished. U.S. Treasury Secretary Janet Yellen said Monday that she saw no signs the economy was entering a recession.
  • The Dollar Index (DXY) oscillates within Monday’s operating range even though the Fed is expected to maintain the status quo on Wednesday. Meanwhile, 10-year US Treasury yields rise above 4.3% ahead of Fed policy.

Technical Analysis: Pound Sterling Breaks 1.2400

Sterling rises above 1.2400, while the overall bias remains weak, as investors see a vulnerable economic outlook for the UK economy, amid expectations of a further interest rate hike by the Bank of England this week. week. The Pound appears bearish overall, and is trading below the 200-day EMA, which is at 1.2490. The bearish 20-day and 50-day EMAs indicate that the short-term trend is bearish. Momentum oscillators also indicate strength in bearish momentum.

Pound Sterling FAQ

What is the Pound Sterling?

The British pound (GBP) is the oldest currency in the world (886 AD) and the official currency of the United Kingdom. It is the fourth most traded currency exchange (FX) unit in the world, representing 12% of all transactions, with an average of $630 billion per day, according to 2022 data.
Its main trading pairs are the GBP/USD, also known as “Cable”, which represents 11% of FX, the GBP/JPY, or the “Dragon” as it is known to traders (3%), and the EUR /GBP (2%). The pound sterling is issued by the Bank of England (BoE).

How do the decisions of the Bank of England influence the pound sterling?

The most important factor that influences the value of the pound sterling is the monetary policy decided by the Bank of England. The BoE bases its decisions on whether it has achieved its main objective of “price stability”, that is, a stable inflation rate of around 2%. Its main instrument to achieve this is the adjustment of interest rates.
When inflation is too high, the BdE tries to contain it by raising interest rates, which makes access to credit more expensive for individuals and companies. Overall, this is positive for sterling, as higher interest rates make the UK a more attractive place for global investors to put their money.
When inflation falls too much it is a sign that economic growth is slowing. In this scenario, the BoE will consider the possibility of lowering interest rates to make credit cheaper, so that companies borrow more to invest in growth-generating projects.

How does economic data influence the value of the Pound?

Data releases measure the health of the economy and can influence the value of the pound. Indicators such as GDP, manufacturing and services PMIs, and employment can influence the direction of the pound.
A strong economy is good for the British pound. Not only does it attract more foreign investment, but it may encourage the Bank of England to raise interest rates, which will directly strengthen sterling. Otherwise, if economic data is weak, the pound is likely to fall.

How does the trade balance affect the Pound?

Another important release for the pound is the trade balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports during a given period.
If a country produces highly sought-after exports, its currency will benefit exclusively from the additional demand created by foreign buyers wishing to purchase these goods. Therefore, a positive net trade balance strengthens a currency and vice versa for a negative balance.

Source: Fx Street

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