Thu. Oct 5th, 2023
    Pound Sterling Shows Signs of Breakdown Ahead of UK Inflation Data

    The Pound Sterling (GBP) is displaying caution as investors remain uncertain about the UK’s economic outlook. With expectations of another interest rate increase from the Bank of England (BoE), all eyes are on the upcoming inflation data, set to be released on Wednesday. Rising energy prices are expected to drive an acceleration in headline inflation, while stable core inflation is attributed to higher labor costs.

    There is growing uncertainty surrounding UK Prime Minister Rishi Sunak’s promise to halve headline inflation to 5% by the end of the year. This promise was made when headline inflation was in double digits in January, and investors are skeptical about whether it can be fulfilled.

    The Pound Sterling appears vulnerable as investors turn cautious, particularly ahead of the release of August’s inflation data. The estimates suggest that headline CPI will continue to rise due to a global rally in oil prices, which have increased by more than 40% in the last four months. Monthly headline CPI is expected to expand by 0.7%, compared to a contraction of 0.4% in July. Annual headline inflation is projected to accelerate to 7.1% from July’s reading of 6.8%.

    Investors are concerned about high core inflation driven by strong wage growth. While the Bank of England typically considers core inflation for monetary policy decisions, higher headline CPI could pose challenges as it would lead to squeezed household incomes due to increased spending on gasoline and energy components.

    Apart from the inflation data, the upcoming interest rate decision from the BoE is also eagerly awaited. A Reuters poll suggests that the BoE will raise interest rates by 25 basis points to 5.5% in September. However, there are doubts about the possibility of further rate hikes in November, with some predicting a pause in monetary policy tightening.

    Potential rate hikes have consequences for the manufacturing sector and labor growth. According to a survey by the British Chamber of Commerce (BCC), 46% of firms reported a negative impact from the rate increases, while 45% stated they were not directly affected.

    Overall, the market mood remains cautious as investors anticipate the US Federal Reserve’s monetary policy decision, which is also scheduled for Wednesday. With the Fed expected to keep rates unchanged, the impact on the US Dollar Index (DXY) remains uncertain.

    In technical analysis, the Pound Sterling is trading near a three-month low around 1.2370, indicating a bearish trend. Investors see a vulnerable economic outlook for the UK, especially with the expectation of another interest rate increase from the BoE.

    The Pound Sterling (GBP) is the official currency of the United Kingdom and the oldest currency in the world. It accounts for a significant portion of global foreign exchange transactions. The value of the Pound Sterling is influenced by monetary policy decisions made by the Bank of England, particularly interest rate adjustments. When inflation is high, raising interest rates can make the UK a more attractive investment destination.

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