Pound Sterling extends losses as core inflation seems unabated near freshly highs

Pound Sterling has extended its losses to near 1.3060 ahead of UK inflation data.
United Kingdom’s hotter CPI data could put more pressure on the economic outlook.
The second consecutive fat interest rate hike from the Bank of England is well-anticipated.

The Pound Sterling (GBP) has slipped sharply to near 1.3060 as investors are shifting their focus toward the United Kingdom Consumer Price Index (CPI) data, which will be released on Wednesday at 06:00 GMT. The GBP/USD pair has dropped as investors are hoping that core inflation will remain elevated and the Bank of England (BoE) would be forced to continue its aggressive policy-tightening spell so that inflation could return to desired levels. This would in turn dampen the economic prospects of Britain economy.

Although United Kingdom’s central bank would be left with no other option than to raise interest rates further, the burden of higher borrowing costs and red-hot inflation will be faced by households. After big-ticket items, the burden of inflationary pressures is extended to the housing sector. UK’s corporate is worried and believes that "the burst of business optimism seen in the spring has faded under the weight of inflation and rising interest rates”.

Daily Digest Market Movers: Pound Sterling seeks immedaite support

Pound Sterling has rebounded after a correction below 1.3100 ahead of the United Kingdom’s inflation data.
As per the consensus, monthly headline CPI reported a pace of 0.4% lower than the prior pace of 0.7%. While annualized inflation is expected to decelerate to 8.2% against the former release of 8.7%.
Core inflation that excludes volatile oil and food prices is expected to remain steady at fresh highs of 7.1%.
The elevated Core Consumer Price Index is expected to increase the burden on households.
Wide deviation in the pace of CPI and labor cost index has already forced households to postpone the purchase of big-ticket items.
United Kingdom’s housing sector has come under pressure amid a decline in home buyers due to higher interest obligations, as reported by UK’s property website Rightmove.
A stubborn inflation report would definitely force the Bank of England to go for a fat rate hike for the second consecutive time.
Investors should note that BoE Governor Andrew Bailey has already raised interest rates to 5%.
Hot inflation is expected to make UK’s economic outlook worsen even more as BoE policymakers would be forced to deliver hawkish commentaries.
Meanwhile, a quarterly survey from Deloitte showed that British firms are extremely cautious in the face of high inflation and rising interest rates.
The overall market mood is quite cautious ahead of the second-quarter result season globally.
The US Dollar Index (DXY) is choppy on early Monday below 100.00 as investors are shifting their focus toward the monthly United States Retail Sales data, which will release on Tuesday at 12:30 GMT.
On Friday, Chicago Federal Reserve (Fed) Bank Austan Goolsbee conveyed that inflation is progressively declining but is still higher than where the Fed wants it to be. Goolsbee reiterated that central bank policymakers are on a "golden path" to containing inflation without triggering recession.
Meanwhile, the tug of war among market participants that the Fed will announce two more rate hikes this year or conclude the policy-tightening spell with a mere one rate hike is still on.
Last week, Fed Governor Christopher Waller commented that two more interest rate hikes are still appropriate by the year-end.

Technical Analysis: Pound Sterling skids below 1.3070

Pound Sterling has tested the strength in the breakout of the Rising Channel chart pattern formed on a daily period by a marginal correction. A breakout of the aforementioned chart pattern indicates immense strength in the upside momentum. Upward-sloping short-to-long-term period Exponential Moving Averages (EMAs) indicate firmness in the Pound Sterling bulls.

Momentum oscillations are oscillating in the bullish trajectory, showing no signs of divergence and any evidence of an oversold situation.

BoE FAQs

What does the Bank of England do and how does it impact the Pound?

The Bank of England (BoE) decides monetary policy for the United Kingdom. Its primary goal is to achieve ‘price stability’, or a steady inflation rate of 2%. Its tool for achieving this is via the adjustment of base lending rates. The BoE sets the rate at which it lends to commercial banks and banks lend to each other, determining the level of interest rates in the economy overall. This also impacts the value of the Pound Sterling (GBP).

How does the Bank of England’s monetary policy influence Sterling?

When inflation is above the Bank of England’s target it responds by raising interest rates, making it more expensive for people and businesses to access credit. This is positive for the Pound Sterling because higher interest rates make the UK a more attractive place for global investors to park their money. When inflation falls below target, it is a sign economic growth is slowing, and the BoE will consider lowering interest rates to cheapen credit in the hope businesses will borrow to invest in growth-generating projects – a negative for the Pound Sterling.

What is Quantitative Easing (QE) and how does it affect the Pound?

In extreme situations, the Bank of England can enact a policy called Quantitative Easing (QE). QE is the process by which the BoE substantially increases the flow of credit in a stuck financial system. QE is a last resort policy when lowering interest rates will not achieve the necessary result. The process of QE involves the BoE printing money to buy assets – usually government or AAA-rated corporate bonds – from banks and other financial institutions. QE usually results in a weaker Pound Sterling.

What is Quantitative tightening (QT) and how does it affect the Pound Sterling?

Quantitative tightening (QT) is the reverse of QE, enacted when the economy is strengthening and inflation starts rising. Whilst in QE the Bank of England (BoE) purchases government and corporate bonds from financial institutions to encourage them to lend; in QT, the BoE stops buying more bonds, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive for the Pound Sterling.

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