Sterling falls after softer than expected UK inflation report

• The British Pound weakened against the US Dollar after UK inflation turned out to be slightly softer than expected.
• Easing UK price pressures raise chances of BoE interest rate cuts.
• Investors are awaiting US CPI data for July.

The British Pound (GBP) faces a sharp sell-off against its major peers in the London session on Wednesday. The British currency is weakening as the UK Office for National Statistics (ONS) has reported a softer than expected Consumer Price Index (CPI) for July, which has raised expectations of sequential interest rate cuts by the Bank of England (BoE).

The annual headline CPI rose by 2.2%, less than estimates of 2.3% but accelerating after returning to the banks’ 2% target in both May and June. In its forecasts, the BoE had already warned that headline inflation could rise again after returning to 2%. Compared with the previous month, the CPI fell by 0.2%.

Core CPI, which excludes volatile items such as food, energy, alcohol and tobacco, slowed at a faster-than-expected pace to 3.3% compared with 3.4% expected and the June figure of 3.5%. A sharp fall in core inflation was triggered by slower growth in services inflation, which has remained an important driving force in maintaining price pressures in the UK economy. Inflation in the services sector eased to 5.2% from 5.7% in the previous release.

Price pressures in the services sector are driven mainly by high wage growth, which also fell to a two-year low in the three months ending in June. The jobs report on Tuesday showed that average earnings excluding bonuses rose at a slower pace of 5.4% from 5.7% in the quarter ending in May. A sharp decline in services inflation due to slower wage growth is expected to come as a big relief to BoE policymakers, who have been concerned that wage pressures might not be brought under control in the near term.

On Monday, Catherine Mann, a member of the BoE’s Monetary Policy Committee (MPC), warned of persistent inflation. “Prices for goods and services are expected to rise again, and wage pressures in the economy could take years to dissipate,” Mann said.

Daily Market Wrap: British Pound Falls Against US Dollar Ahead of US Inflation

• The British Pound falls to near 1.2820 against the US Dollar (USD) in European trading hours on Wednesday. The GBP/USD pair falls as the British currency weakens following the release of the soft UK inflation report. Meanwhile, the near-term outlook for the US Dollar is also uncertain ahead of the US CPI data for July, due out at 12:30 GMT.
• The US Dollar Index (DXY), which tracks the value of the greenback against six major currencies, rose to near 102.67 in the European session on Wednesday after correcting to a fresh weekly low of 102.55 on Tuesday.
• US annual headline and core inflation are expected to have slowed by one-tenth to 2.9% and 3.2%, respectively, with monthly figures growing by 0.2%. Inflation data will significantly influence market expectations on Fed interest rate cuts for the rest of the year.
• The US Dollar saw a sharp sell-off on Tuesday after a mostly soft Producer Price Index (PPI) report for July raised market expectations that the Federal Reserve (Fed) will begin cutting interest rates more aggressively.
• According to the CME FedWatch tool, 30-day federal funds futures price data show traders see a 54.5% chance of a 50 basis point (bps) rate cut in September. The probability of a 50 bps rate cut has risen slightly following the release of the PPI report, but is still significantly lower than the 69% recorded a week ago.
• The PPI report showed that headline producer inflation came in at 2.2%, lower than estimates of 2.3% and the June reading of 2.7%. Over the same period, core PPI grew at a slower pace of 2.4% versus expectations of 2.7% and the previous release of 3%. A sharp decline in the pricing power of owners at factory gates boosted investor confidence that inflation is on track to return to the desired rate of 2%.

Technical Analysis: Sterling falls from two-week high of 1.2870

The British Pound is falling near 1.2820 against the US Dollar after posting a fresh two-week high at 1.2870. The GBP/USD pair’s near-term appeal remains firm as it holds the 20-day exponential moving average (EMA), which is trading around 1.2800.

Previously, Cable showed a strong recovery from the six-week low of 1.2665 after a positive divergence formation on a daily time frame, in which the pair continues to build higher lows while the momentum oscillator makes lower lows. This usually results in a resumption of the uptrend, but needs to be confirmed with more indicators.

The 14-day Relative Strength Index (RSI) is rebounding after finding support near 40.00, exhibiting signs of buying interest at lower levels.

On the upside, the August 2 high at 1.2840 and the round-level resistance of 1.2900 will act as important resistances for the British Pound. Alternatively, the recovery move could fail if the asset breaks below the August 8 low at 1.2665. This would expose the asset to the June 27 low at 1.2613, followed by the April 29 high at 1.2570.