Caution is advised on the British pound (GBP) as investors remain uncertain about the UK’s economic outlook. With expectations of another interest rate hike from the Bank of England (BoE), all eyes are on the next inflation data, due to be released on Wednesday. Rising energy prices are expected to lead to an acceleration in headline inflation, while stable domestic inflation is due to higher labor costs.
There is growing uncertainty over British Prime Minister Rishi Sunak’s promise to halve headline inflation to 5% by the end of the year. That promise was made when headline inflation hit double digits in January, and investors are skeptical that it can be kept.
The British pound appears vulnerable as investors turn cautious, particularly ahead of the release of August inflation data. Estimates suggest that the overall CPI will continue to rise due to a global recovery in oil prices, which have risen more than 40% in the last four months. The overall monthly CPI is expected to rise 0.7%, compared to a 0.4% decline in July. Headline annual inflation is expected to accelerate to 7.1% compared to July’s 6.8%.
Investors are concerned about high domestic inflation caused by strong wage growth. While the Bank of England generally takes domestic inflation into account when making monetary policy decisions, higher headline inflation could pose a challenge as it would lead to a deterioration in household incomes due to increased spending on petrol and energy.
In addition to the inflation data, the BoE’s interest rate decision is also eagerly awaited. The BoE will raise interest rates by 25 basis points to 5.5% in September, according to a Reuters poll. However, there are doubts about the possibility of further rate hikes in November, with some predicting a pause in restrictive monetary policy.
Potential tariff increases will have consequences for the manufacturing sector and job growth. According to a survey by the British Chambers of Commerce (BCC), 46% of businesses reported a negative impact from tariff increases, while 45% said they were not directly affected.
Overall, market sentiment remains cautious as investors await the US Federal Reserve’s monetary policy decision, also scheduled for Wednesday. With the Fed expected to leave interest rates unchanged, the impact on the US Dollar Index (DXY) remains uncertain.
According to technical analysis, the British pound is trading near a three-month low of around 1.2370, indicating a bearish trend. Investors see an uncertain economic outlook for the UK, particularly given expectations of another rate hike by the BoE.
The British Pound Sterling (GBP) is the official currency of the United Kingdom and the oldest in the world. It accounts for a significant portion of global currency transactions. The value of the pound sterling is influenced by monetary policy decisions by the Bank of England, particularly interest rate adjustments. When inflation is high, an increase in interest rates can make the UK a more attractive investment destination.
