Pound Sterling recovers losses as US inflation softening extends

Pound Sterling has recaptured the crucial resistance of 1.2960 as the United States inflation has softened more than expected.
United Kingdom firms are offering higher payroll charges to offset labor shortages.
Britain’s jobless rate has jumped to 4% and the Claimant Count Change has added fresh 25.7K job seekers.

The Pound Sterling (GBP) has recovered its entire losses swiftly United States inflation data has decelerated further. The GBP/USD pair has picked immense strength as weak US inflation numbers might support a skip in the policy-tightening spell consecutively. Meanwhile, chances of a bulky interest rate hike from the Bank of England (BoE) have escalated, knowing the fact, that higher disposable income available to households will result in higher purchasing power, and eventually the overall demand will elevate further.

United Kingdom firms are offering higher wages to attract fresh talent amid labor shortages. Scrutiny of the Employment data indicates that the jobless rate has increased as firms have started avoiding credit due to higher interest rate attachment. It seems that the chances of a fat rate hike by the BoE will remain elevated as higher wage pressures are sufficient to offset the impact of a rise in the Unemployment Rate.

Daily Digest Market Movers: Pound Sterling climbs as inflation softens

Pound Sterling auctions comfortably above 1.2900 United Kingdom labor cost has turned out hotter than expected.
Three-month Average Earnings excluding bonuses have remained steady at 7.3% while investors were anticipating a decline to 7.1%.
Claimant Count Change has jumped to 25.7K while there was a decline of 22.5K claims last month. Three-month Unemployment Rate has increased to 4.0% vs. the expectations and the former release of 3.8%.
Higher wage pressures are sufficient to offset a significant rise in the jobless rate.
Market participants are expecting that the interest rates by the Bank of England would peak at 6.25-6.50%.
BoE Governor Andrew Bailey conveyed on Monday that the central bank will keep the job market under observation in an attempt to bring down inflation.
Andrew Bailey reiterated that the central bank is making efforts to provide an environment of price stability.
United Kingdom FM Jeremy Hunt cited on Monday that the government and the central bank "will do what is necessary, for as long as necessary" to return inflation to its 2% target.
Inflation in Britain's economy has softened from its peak of 11.1%, however, the promise made by UK PM Rishi Sunak that inflationary pressures would halve by year-end would be missed.
A survey from British Retail Consortium (BRC) showed that higher food prices have squeezed the budgets of households, which has eased demand for big-ticket items.
Households are facing the burden of high price pressures as the pace of inflation is higher than the velocity of labor costs.
Last week, Andrew Bailey urged industry regulators to stop overcharging customers for fuel.
This week, UK’s economic calendar is full of events as the labor market data will be followed by Wednesday’s Financial Policy Committee (FPC) minutes, and Thursday’s Industrial and Manufacturing data (May).
Monthly Industrial Production and Gross Domestic Product (GDP) are expected to contract by 0.4%. And Manufacturing Production is seen contracting by 0.5%.
Market sentiment is quite bullish amid an upbeat appeal for risk-sensitive currencies.
The US Dollar Index (DXY) has extended its four-day losing spell as investors are hoping only one interest rate hike has left in the toolkit of the Federal Reserve (Fed).
Cleveland Fed President Loretta Mester, in a speech at the University of San Diego, cited that “The economy has shown more underlying strength than anticipated earlier this year, and inflation has remained stubbornly high, with progress on core inflation stalling,” as reported by Reuters.
Monthly United States headline and core Consumer Price Index (CPI) have delivered a higher pace of 0.4% vs. consensus of 0.3%. On an annualized basis headline and core inflation have decelerated to 3.0% and 4.8% respectively.

Technical Analysis: Pound Sterling runs swiftly to 1.2970

Pound Sterling has continued its four-day winning streak after overstepping Monday’s high at 1.2868. The Cable is approaching the Rising Channel chart pattern formed on a daily period in which each pullback is considered a buying opportunity for investors. Upward-sloping 50-and 200-period daily Exponential Moving Averages (DEMAs) indicate that the overall trend is extremely bullish. Bounded oscillators are demonstrating strength in the upside momentum.

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.

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