Pound Sterling sets for a breakdown on hotter inflation outlook

Pound Sterling trades sideways despite weak labor market data.
The UK shed jobs in the three months to July while wage growth remains high.
The BoE may opt for another interest rate increase in September as UK inflation is the highest among G7 economies.

The Pound Sterling (GBP) fails to defend its crucial support at 1.2500 after the release of a vulnerable labor market report for July. The GBP/USD pair remains under pressure on signs of increasing unemployment but persistent wage growth. Bank of England (BoE) policymakers are expected to face pressure from a stubborn inflation outlook due to strong wage growth and a bleak labor market outlook due to higher interest rates.

The UK’s labor market report for July suggests that the economy is facing headwinds from persistent inflation and economic slowdown. More stress on the economy is highly anticipated as the BoE is preparing to raise interest rates for the 15 consecutive time on September 21. While BoE Governor Andrew Bailey said last week that interest rates are near their peak, a fresh rate hike in September cannot be ruled out as inflation in the UK economy is still the highest among G7 economies.

Daily Digest Market Movers: Pound Sterling drops as labor market cools down

Pound Sterling skids below 1.2500 as the UK Office for National Statistics reported a weaker-than-anticipated labor market report for July.
UK employers shed 207K jobs in the three months to July, more than the 185K decline forecasted by markets. In the three months to June, the labor market lost 66K payrolls.
The Unemployment Rate for the quarter ending to July rose to 4.3% as anticipated by market participants from the prior reading of 4.2%.
In August, the Claimant Count Change increased by a mild 900. Investors anticipated the number of people claiming jobless benefits to increase by 17.1K against July’s reading of 29K. Lower claims indicate that labor demand held up.
The economic indicator that keeps pressure on Bank of England policymakers is the strong wage growth.
Average Earnings excluding bonuses in the three months to July landed at 7.8%, in line with estimates and the former release. Wage growth data including bonuses rose to 8.5% against projections and the former release of 8.2%.
Strong wage growth might keep the consumer spending momentum at a high pace as households receive higher disposable income. This will keep inflationary pressures sticky, a problem for BoE policymakers.
BoE Deputy Governor appointee, Sarah Breeden, said on Tuesday, “I agree with the MPC that the risks to inflation around the August forecast are to the upside.”
July’s labor market report is going to accelerate uncertainty about September’s monetary policy meeting. The labor market seems to be weakening sharply but wage growth remains persistent, which would leave space for further policy-tightening by the central bank.
The BoE is widely expected to raise interest rates on September 21 by 25 basis points (bps) to 5.50% while investors will keenly watch guidance for the rest of the year.
Last week, BoE policymaker Swati Dhingra said that current interest rates are “sufficiently restrictive” and further policy tightening could hurt the economy.
After labor market data, investors will focus on monthly GDP and factory activity data for July, which will be published on Wednesday at 06:00 GMT.
The market sentiment remains quiet as investors await the United States Consumer Price Index (CPI) data for August, which will be published on Wednesday at 12:30 GMT.
The US Dollar Index (DXY) finds feet after a sell-off from the six-month high of 105.10 on renewed fears of a global slowdown.
A slowdown in the property sector and huge debt in China is raising doubts over its economic outlook. According to a Reuters poll, the Chinese economy is expected to grow 5.0% this year, lower than the 5.5% forecast in a July survey. For 2024 and 2025, growth is forecast at 4.5% and 4.3%, respectively.
A power-pack action is anticipated in the USD Index after the release of the inflation data. According to estimates, headline inflation is expected to grow at a higher pace of 0.5% in August on month against the 0.2% pace recorded for July. Core CPI is seen steady at 0.2%. The reacceleration in headline inflation is driven by a strong rebound in gasoline prices.
An upside surprise in inflation would elevate the chances of one more interest rate hike by the Federal Reserve (Fed) in the remainder of the year.

Technical Analysis: Pound Sterling exposes to 1.2400

Pound Sterling strives to defend the psychological support of 1.2500 after a vulnerable labor market report. The Cable broadly trades sideways after recovering from the crucial support of 1.2460. The asset continues to trade near the 200-day Exponential Moving Average (EMA), which remains around 1.2500. While the short trend is bearish as the 20 and 50-day EMAs are downward-sloping, momentum oscillators portray strength in the bearish impulse.

Pound Sterling FAQs

What is the Pound Sterling?

The Pound Sterling (GBP) is the oldest currency in the world (886 AD) and the official currency of the United Kingdom. It is the fourth most traded unit for foreign exchange (FX) in the world, accounting for 12% of all transactions, averaging $630 billion a day, according to 2022 data.
Its key trading pairs are GBP/USD, aka ‘Cable’, which accounts for 11% of FX, GBP/JPY, or the ‘Dragon’ as it is known by traders (3%), and EUR/GBP (2%). The Pound Sterling is issued by the Bank of England (BoE).

How do the decisions of the Bank of England impact on the Pound Sterling?

The single most important factor influencing the value of the Pound Sterling is monetary policy decided by the Bank of England. The BoE bases its decisions on whether it has achieved its primary goal of “price stability” – a steady inflation rate of around 2%. Its primary tool for achieving this is the adjustment of interest rates.
When inflation is too high, the BoE will try to rein it in by raising interest rates, making it more expensive for people and businesses to access credit. This is generally positive for GBP, as higher interest rates make the UK a more attractive place for global investors to park their money.
When inflation falls too low it is a sign economic growth is slowing. In this scenario, the BoE will consider lowering interest rates to cheapen credit so businesses will borrow more to invest in growth-generating projects.

How does economic data influence the value of the Pound?

Data releases gauge the health of the economy and can impact the value of the Pound Sterling. Indicators such as GDP, Manufacturing and Services PMIs, and employment can all influence the direction of the GBP.
A strong economy is good for Sterling. Not only does it attract more foreign investment but it may encourage the BoE to put up interest rates, which will directly strengthen GBP. Otherwise, if economic data is weak, the Pound Sterling is likely to fall.

How does the Trade Balance impact the Pound?

Another significant data release for the Pound Sterling is the Trade Balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports over a given period.
If a country produces highly sought-after exports, its currency will benefit purely from the extra demand created from foreign buyers seeking to purchase these goods. Therefore, a positive net Trade Balance strengthens a currency and vice versa for a negative balance.

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