Pound Sterling grips gains near 1.3000 with focus on UK Inflation

The Pound Sterling ranges near 1.3000 against the US Dollar, focusing on US/UK data.
Fed’s Powell admitted that recent inflation readings have added some confidence in disinflation towards 2%.
BoE’s Dhingra supported lowering interest rates sooner.

The Pound Sterling (GBP) consolidates slightly below the psychological resistance of 1.3000 against the US Dollar (USD) in Tuesday’s London session. The GBP/USD pair struggles to extend its upside as the US Dollar gains ground after Federal Reserve (Fed) Chair Jerome Powell’s speech at the Economic Club of Washington on Monday.

The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, manages to hold the key support at around 104.00.

Powell acknowledged that recent inflation data has added confidence that inflation is on course to return to the desired rate of 2%. However, he mentioned that policymakers need to gain more confidence before considering interest rate cuts.

Separately, San Francisco Federal Reserve Bank President Mary Daly said, “confidence is growing” that inflation is heading towards the 2% target. Daly refrained from providing a timeframe for rate cuts. She further said that the central bank should hold rates so that they manage to maintain downside pressure on inflation but not too long that they become a challenge to job growth.

In Tuesday’s session, investors will focus on the US Retail Sales data, which is expected to show that sales at retail stores remained unchanged in June after a meager growth of 0.1% in May.

Daily digest market movers: Pound Sterling exhibits strength in a busy UK data-packed week

The Pound Sterling remains broadly bullish against its major peers on Tuesday, with the focus on the United Kingdom (UK) Consumer Price Index (CPI) for June and the employment data for the three months ending May, which will be published on Wednesday and Thursday, respectively.
Investors will pay close attention to the inflation readings as they will suggest whether the Bank of England (BoE) will start reducing interest rates from the August meeting, as expected by financial markets. Economists expect the annual headline and core CPI, which excludes volatile food and energy prices, to have grown steadily by 2% and 3.5%, respectively. The monthly headline inflation is estimated to have risen at a slower pace of 0.1% from the former reading of 0.3%.
Apart from the standard inflation components, investors will keenly focus on the status of price pressures in the service sector, a major factor that has been restricting BoE policymakers from advocating early rate cuts.
On Monday, BoE’s external member of the Monetary Policy Committee Swati Dhingra cited concerns over squeezing consumer spending due to the maintenance of a restrictive interest rate framework. She favored cutting borrowing rates with the belief that inflation is unlikely to rise sharply again.
Meanwhile, the three-month-ending in May ILO Unemployment Rate is estimated to remain steady at 4.4%. In the same period, other key components on which market participants will keenly focus are Average Earnings, Excluding and Including bonuses, a key measure of wage growth that fuels service inflation. The wage growth measure, Excluding and Including bonuses, is estimated to decelerate to 5.7%.

Technical Analysis: Pound Sterling clings to gains near 1.3000

The Pound Sterling trades back and forth after rising to near the psychological figure of 1.3000. The GBP/USD pair clings to gains amid uncertainty over the US Dollar’s outlook. The Cable's near-term appeal has strengthened after a breakout above the March 8 high near 1.2900. The pair is expected to extend its upside towards the two-year high near 1.3140.

All short-to-long-term Exponential Moving Averages (EMAs) are sloping higher, suggesting a strong bullish trend.

The 14-day Relative Strength Index (RSI) jumps to nearly 70.00 for the first time in more than a year, indicating a strong momentum towards the upside.

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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