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Pound Sterling continues to trade lackluster ahead of key inflation figures


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  • Pound Sterling is still inside the woods as investors are sidelined ahead of inflation data.
  • United Kingdom’s inflation is expected to soften slowly as labor market conditions are extremely tight.
  • The Bank of England is expected to raise interest rates further to sharpen its quantitative tools against stubborn inflation.

The Pound Sterling (GBP) is stabilizing on Monday above 1.2800 after showing a big bullish performance last week, rallying to levels not seen since April 2022, above 1.2800. Investors are keeping an eye on the United Kingdom’s key inflation data, to be released on Wednesday at 6 GMT. The GBP/USD pair is showing a severe contraction in volatility to start the week, ahead of the release of key price indicators, which will provide guidance about the interest rate policy from the Bank of England (BoE).

Tight labor market conditions and higher food prices in the United Kingdom have remained major catalysts that have been keeping inflationary pressures elevated. More interest rate hikes by the UK central bank are widely expected as inflation has not shown yet evidence of coming down.

Daily digest market movers: Pound Sterling keeps hovering near 13-month highs

  • Less volatile action is reported by the Pound Sterling as investors are awaiting the release of the UK Consumer Price Index (CPI) data.
  • UK’s monthly headline inflation (May) is expected to show a pace of 0.4%, slower than the pace of 1.2% registered in April.
  • Annualized headline CPI is seen softening to 8.5% vs. the prior release of 8.7% while core inflation that excludes oil and food prices is seen steady at 6.8%.
  • UK’s food price inflation is hovering near a 45-year high at 19% which is keeping inflationary pressures at higher levels.
  • The event of Brexit and the execution of early retirement by individuals have resulted in shortages of labor.
  • British firms are offsetting labor shortages by offering higher wages, which have increased households’ demand for core goods and services.
  • Reuters reported that the BoE looks set to raise interest rates by a quarter point to a 15-year high of 4.75% on June 22.
  • For the interest rate guidance, a poll from Reuters indicates that UK’s interest rates will peak around 6% this year.
  • BoE Governor Andrew Bailey has already confirmed that inflation is extremely persistent and will take more time to return to the desired rate than expected earlier.
  • UK Finance Minister Jeremy Hunt has ruled out giving any direct fiscal support to households struggling with soaring mortgage costs, as reported by Financial Times. Fiscal support to individuals might fuel the price index and force the central banks to elevate interest rates further.
  • IMF expects that the UK will avoid recession this year and has upgraded its economic growth forecast to 0.4%. Earlier, it was expecting a contraction of 0.3%.
  • The US Dollar Index (DXY) is inside the woods as investors are having mixed responses about Federal Reserve’s (Fed) policy guidance.
  • As per the CME Fedwatch tool, investors are expecting that Fed chair Jerome Powell will hike interest rates just once this year.
  • Richmond Fed Bank President Thomas Barkin has commented that raising rates further could create the risk of a more significant slowdown in the economy. It will be comfortable doing more on interest rates if coming data doesn’t confirm a story that slowing demand is returning inflation to the 2% target.”
  • Chicago Fed President Austan Goolsebee commented that there is conflicting data on whether we are too hot or whether we have done enough.
  • The United States Consumer Sentiment Index has improved to 63.6 as a soft consumer and producer inflationary pressures have infused optimism among the market participants.

Technical Analysis: Pound Sterling continues non-directional performance

The Pound Sterling has stabilized after printing a fresh 13-month high at 1.2848. The Cable is showing a lackluster performance but is expected to continue its four-day winning streak as the USD Index is facing pressure due to a shift in sentiment about Fed’s interest rate guidance. Horizontal support is plotted from 26 May 2022 high at 1.2667, which will act as a cushion for the Pound Sterling.

Sentiment for the GBP/USD pair will get more bullish if it manages to climb above a fresh 13-month high at 1.2848. The Pound Sterling could lose its strength if the Cable drop below June’s low around 1.2370

Inflation FAQs

What is inflation?

Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.

What is the Consumer Price Index (CPI)?

The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.

What is the impact of inflation on foreign exchange?

Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.

How does inflation influence the price of Gold?

Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it.
Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.