Pound Sterling gains on hotter than expected UK inflation data
- The Pound Sterling moves higher against its peers after the release of the hot UK CPI report for July.
- Both the UK headline and the core CPI grew at an annual pace of 3.8%.
- Investors await the UK-US flash PMI for August and Fed Powell’s speech at the Jackson Hole Symposium.
The Pound Sterling (GBP) attracts significant bids against its major peers on Wednesday as the United Kingdom (UK) Consumer Price Index (CPI) data for July has come in hotter than projected. The Office for National Statistics (ONS) reported that the headline inflation rose at an annual pace of 3.8%, faster than expectations of 3.7% and 3.6% in June, a key factor that will allow the Bank of England (BoE) to maintain its “gradual and careful” monetary expansion guidance going forward.
The core CPI – which excludes volatile items such as food, energy, alcohol, and tobacco – grew at a faster pace of 3.8% on year, compared to estimates and the prior release of 3.7%. Month-on-month headline CPI rose by 0.1%, while it was expected to deflate by the same pace.
Inflation in the services sector, which is closely tracked by BoE members, has also grown at a faster pace of 5.0% on year, against the former reading of 4.7%.
In the policy meeting earlier this month, BoE Governor Andrew Bailey warned that rising food and energy prices are de-anchoring consumer inflation expectations. The BoE also raised one-year forward CPI projections to 2.7% from 2.4%.
According to an August 13-19 Reuters poll, the BoE will cut interest rates just once in the remainder of the year. In the August policy meeting, the BoE reduced borrowing rates by 25 basis points (bps) to 4%, as expected, but with a slim majority.
Daily digest market movers: Pound Sterling bounces back against US Dollar
- The Pound Sterling recovers to near 1.3500 against the US Dollar (USD) on Wednesday after the release of the hot UK CPI report for July. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, trades almost flat during the European session after posting a fresh weekly high near 98.00 earlier in the day.
- The US Dollar trades broadly firm as investors worry that Federal Reserve (Fed) Chair Jerome Powell could reiterate a restrictive monetary policy guidance in his speech at the Jackson Hole (JH) Symposium, which is scheduled for Friday.
- Jerome Powell has been arguing against any need for monetary policy adjustments, citing that the United States (US) central bank is still gauging the likely consequences of President Donald Trump’s tariff policy on inflation and the economy.
- The latest US CPI report for July showed a limited impact of tariffs on inflation; however, the Producer Price Index (PPI) report for the same month signaled that business owners are passing the impact of additional import duties to consumers.
- According to the CME FedWatch tool, there is an almost 85% chance that the Fed will cut interest rates by 25 basis points (bps) to the 4.00%-4.25% range in the September meeting.
- This week, investors will also focus on the preliminary UK-US S&P Global Purchasing Managers’ Index (PMI) data for August, which will be published on Thursday.
- On the global front, a trilateral summit is expected between US President Trump, Russian President Vladimir Putin, and Ukrainian President Volodymyr Zelenskyy for further discussions about ending the war in Ukraine. Leaders are expected to meet in Budapest to discuss concessions for the Russia-Ukraine truce, according to a report from Politico.
Technical Analysis: Pound Sterling attracts bids near 20-day EMA
The Pound Sterling bounces back sharply after a corrective move to near the 20-day Exponential Moving Average (EMA) around 1.3465 on Wednesday, suggesting buying interest at lower levels.
The 14-day Relative Strength Index (RSI) strives to break above 60.00. A fresh bullish momentum would emerge if the RSI breaks above that level.
Looking down, the August 11 low of 1.3400 will act as a key support zone. On the upside, the July 1 high near 1.3790 will act as a key barrier.
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, also known as ‘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.
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