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Pound Sterling turns subdued as UK’s economy takes bullet due to higher inflation


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  • Pound Sterling is broadly demonstrating a lackluster performance below 1.3100.
  • United Kingdom’s inflation is expected to soften as producers have cut prices at factory gates.
  • The Bank of England might continue raising interest rates as the 2% target remains far.

The Pound Sterling (GBP) drops as the upside seems restricted amid caution among market participants ahead of the United Kingdom’s inflation data. The GBP/USD pair struggles in finding a key trigger and has been oscillating near 1.3100. The current volatility squeeze is expected to be followed by an explosion once inflation data is published on Wednesday. UK producer prices have recently eased, as did household demand for big-ticket items, but inflation for consumers has proven to be more persistent than initially expected. 

The consequences of the United Kingdom’s higher inflation have been widening their scope and the impact of the drop in sales of big-ticket items and the housing sector is expanding to labor market conditions. Wages might fail in maintaining their steady pace and the employment generation process is likely to slow as firms are postponing their expansion plans to avoid higher interest-payment obligations.

Daily Digest Market Movers: Pound Sterling struggles to find direction

  • Pound Sterling has faced stiff resistance around 1.3100 as the upcoming United Kingdom inflation data hogs the limelight.
  • Market expectations show that June’s monthly inflation grew at a pace of 0.4%, lower than the  0.7% increase seen in May. Annual headline inflation is expected to decelerate to 8.2% from 8.7% a month earlier.
  • The core Consumer Price Index, which strips out the more-volatile categories of food and energy, has been a troublemaker for Bank of England policymakers due to its stubbornness. The measure is expected to remain steady at fresh highs of 7.1%.
  • Inflation in the British economy has been fueled by labor shortages and 45-year-high food inflation.
  • Food inflation is expected to soften as producers have cut prices for the first time in more than three years after cost pressures have started to relent, according to a survey from Lloyds Bank reported by The Times.
  • Apart from consumer prices, investors will focus on Producer Price Index (PPI) figures. Investors should note that UK Finance Minister Jeremy Hunt was in discussions with industry regulators to stop overcharging prices.
  • Producer prices are expected to remain extremely soft, according to market expectations, adding to evidence of easing price pressures in the pipeline.
  • In spite of the deceleration in factory prices, the Bank of England (BoE) Governor Andrew Bailey said the bank will continue hiking interest rates by a wide margin.
  • UK inflation has remained extremely persistent, increasing the chances of further policy tightening by the BoE and heavily weighing on economic prospects.
  • A quarterly survey compiled by Deloitte showed that top executives in UK firms expect a slowdown in fresh employment and wage hikes.
  • Cooling labor market conditions would be welcomed by BoE policymakers as consumer inflation expectations would likely ease. Still, the economic outlook would also worsen.
  • The overall market mood is quite upbeat amid a decent appeal for risk-perceived assets.
  • The US Dollar Index (DXY) edged down while attempting to sustain an auction above the psychological resistance of 100.00.
  • Investors are anticipating a volatile action in the US Dollar ahead of the release of the United States Retail Sales data for June, which will be published at 12:30 GMT.
  • While higher interest rates by the Federal Reserve (Fed) have propelled fears of bleak economic prospects, US Treasury Secretary Janet Yellen said on Monday that the economy is making good progress in bringing inflation down and she doesn’t expect a recession, Bloomberg reports.

Technical Analysis: Pound Sterling consolidates around 1.3100

Pound Sterling is still testing its strength in the breakout of the Rising Channel pattern formed on the daily chart by a marginal correction. A breakout of this pattern indicates immense strength in the upside momentum. Upward-sloping short-to-long-term daily Exponential Moving Averages (EMAs) also indicate firmness for Pound Sterling bulls.

Momentum oscillators are in the bullish trajectory, showing no signs of divergence or any evidence of an oversold situation.

Pound Sterling FAQs

The Pound Sterling (GBP) is the oldest currency in the world (886 AD) and the official currency of the United Kingdom. It is the fourth most traded unit for foreign exchange (FX) in the world, accounting for 12% of all transactions, averaging $630 billion a day, according to 2022 data.
Its key trading pairs are GBP/USD, aka ‘Cable’, which accounts for 11% of FX, GBP/JPY, or the ‘Dragon’ as it is known by traders (3%), and EUR/GBP (2%). The Pound Sterling is issued by the Bank of England (BoE).

The single most important factor influencing the value of the Pound Sterling is monetary policy decided by the Bank of England. The BoE bases its decisions on whether it has achieved its primary goal of “price stability” – a steady inflation rate of around 2%. Its primary tool for achieving this is the adjustment of interest rates.
When inflation is too high, the BoE will try to rein it in by raising interest rates, making it more expensive for people and businesses to access credit. This is generally positive for GBP, as higher interest rates make the UK a more attractive place for global investors to park their money.
When inflation falls too low it is a sign economic growth is slowing. In this scenario, the BoE will consider lowering interest rates to cheapen credit so businesses will borrow more to invest in growth-generating projects.

Data releases gauge the health of the economy and can impact the value of the Pound Sterling. Indicators such as GDP, Manufacturing and Services PMIs, and employment can all influence the direction of the GBP.
A strong economy is good for Sterling. Not only does it attract more foreign investment but it may encourage the BoE to put up interest rates, which will directly strengthen GBP. Otherwise, if economic data is weak, the Pound Sterling is likely to fall.

Another significant data release for the Pound Sterling is the Trade Balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports over a given period.
If a country produces highly sought-after exports, its currency will benefit purely from the extra demand created from foreign buyers seeking to purchase these goods. Therefore, a positive net Trade Balance strengthens a currency and vice versa for a negative balance.