- The British pound is showing signs of another breakout ahead of the UK’s August inflation data.
- Overall inflation in the UK is accelerating due to rising energy prices.
- Uncertainty is growing over whether Prime Minister Sunak will deliver on his promise to halve headline inflation to 5% by the end of the year.
The British Pound Sterling (GBP) is trying to recover even as investors remain uncertain about Britain’s economic outlook. Expectations are high for the Bank of England (BoE) to raise interest rates again, a decision due to be announced on Thursday. The BoE is unable to pause its monetary tightening as inflationary pressures remain stubborn and wage growth momentum is strong.
Ahead of the BoE’s interest rate decision, investors will be closely watching inflation data expected on Wednesday. The headline consumer price index (CPI) is expected to accelerate on rising energy prices as global oil prices have recovered over the past four months. Due to the increase in the labor cost index, core inflation will remain virtually stable. Market participants appear to doubt that British Prime Minister Rishi Sunak will keep his promise to halve headline inflation to 5% by the end of the year. Sunak promised to cut inflation to 5% when headline inflation hit double digits in January.
Daily Market Action Roundup: Pound recovers as it awaits inflation data
- The British pound finds support at 1.2370 ahead of UK August inflation data due at 0600 GMT on Wednesday.
- Headline inflation is expected to continue rising as global oil prices have recovered more than 40% in the past four months.
- Despite the 0.4% decline, the overall monthly CPI is estimated to have increased by a stronger 0.7% in July. Headline annual inflation is expected to accelerate to 7.1% from 6.8% in July.
- The annualized core CPI, which excludes volatility in oil and food prices, would decline slightly to 6.8% 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 thinking about monetary policy. However, a higher overall CPI could cause them problems as household incomes would fall due to higher out-of-pocket spending on gasoline and energy components.
- The August inflation data will be followed by the BoE’s interest rate decision, which will be announced on Thursday.
- The BoE will raise interest rates by 25 basis points (bp) to 5.5% in its next monetary policy decision, scheduled for September 21, according to a Reuters poll.
- Aside from the September interest rate decision, investors want to know whether the BoE will raise interest rates in November or whether they will wait to see the impact of current policy rates before making a decision.
- Citigroup now predicts the BoE will suspend interest rate hikes in November, up from the 25 basis point hike it previously forecast.
- Further interest rate hikes by the central bank would increase their impact on manufacturing and job growth. The British Chambers of Commerce (BCC) reported on Monday that 46% of businesses surveyed said the previous tariff increase had a negative impact, while 45% said they were not directly affected.
- Market sentiment in the US remains cautious awaiting the Federal Reserve’s (Fed) monetary policy decision to be announced on Wednesday. The Fed is expected to keep interest rates unchanged as inflation falls and the economy remains robust.
- It will be interesting to see whether the Fed manages to put the economy on a path to combat inflation, even though the economic outlook has only deteriorated slightly. US Treasury Secretary Janet Yellen said on Monday that she sees no signs that the economy is slipping into recession.
- The dollar index (DXY) is hovering within Monday’s operating range, although the Fed is expected to maintain the status quo on Wednesday. Meanwhile, 10-year Treasury yields are rising above 4.3% ahead of Fed policy.
Technical analysis: Pound Sterling breaks 1.2400
Sterling rises above 1.2400 while the broader trend remains weak as investors see an uncertain economic outlook for the UK economy amid expectations of a further rate hike by the Bank of England this week. The pound appears bearish overall and is trading below the 200-day EMA located at 1.2490. The bearish 20-day and 50-day EMAs suggest that the short-term trend is bearish. Momentum oscillators also indicate strength in bearish momentum.
Frequently Asked Questions about Pound Sterling
The British Pound (GBP) is the oldest currency in the world (886 AD) and the official currency of the United Kingdom. According to 2022 data, it is the fourth most traded foreign exchange (FX) unit in the world, accounting for 12% of all transactions with an average value of $630 billion per day.
Its main trading pairs are GBP/USD, also known as “Cable”, which accounts for 11% of FX, GBP/JPY or the “Dragon” as it is called by traders (3%), and EUR/GBP (2%) . The pound sterling is issued by the Bank of England (BoE).
The most important factor affecting 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 goal of “price stability”, i.e. a stable inflation rate of around 2%. Your most important tool for this is adjusting interest rates.
If inflation is too high, the BdE tries to curb it by raising interest rates, which makes access to credit more expensive for private individuals and companies. Overall, this is positive for sterling as higher interest rates make the UK a more attractive place to invest for global investors.
If 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, allowing companies to borrow more to invest in growth-enhancing projects.
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 will this attract more foreign investment, but it could also encourage the Bank of England to raise interest rates, which will directly strengthen sterling. Otherwise, the pound is likely to fall on weak economic data.
Another important factor 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 in a given period.
If a country produces desirable export goods, its currency benefits exclusively from the additional demand from foreign buyers who want to purchase these goods. Therefore, a positive net trade balance strengthens a currency and, conversely, a negative balance.