Pound Sterling gains as UK inflation accelerates stronger than expected
- The Pound Sterling moves higher against its peers after the release of the hot UK CPI report for July.
- Both the UK headline and the core CPI grew at an annual pace of 3.8%.
- Investors await the UK-US flash PMI for August and Fed Powell’s speech at the Jackson Hole Symposium.
The Pound Sterling (GBP) attracts significant bids against its major peers on Wednesday as the United Kingdom (UK) Consumer Price Index (CPI) data for July has come in hotter than projected. The Office for National Statistics (ONS) reported that the headline inflation rose at an annual pace of 3.8%, faster than expectations of 3.7% and 3.6% in June, a key factor that will allow the Bank of England (BoE) to maintain its “gradual and careful” monetary expansion guidance going forward.
The core CPI – which excludes volatile items such as food, energy, alcohol, and tobacco – grew at a faster pace of 3.8% on year, compared to estimates and the prior release of 3.7%. Month-on-month headline CPI rose by 0.1%, while it was expected to decline by the same pace.
Inflation in the services sector, which is closely tracked by BoE members, has also grown at a faster pace of 5.0% on year, against the former reading of 4.7%.
In the policy meeting earlier this month, BoE Governor Andrew Bailey warned that rising food and energy prices are de-anchoring consumer inflation expectations. The BoE also raised one-year forward CPI projections to 2.7% from 2.4%.
According to an August 13-19 Reuters poll, the BoE will cut interest rates just once in the remainder of the year. In the August policy meeting, the BoE reduced borrowing rates by 25 basis points (bps) to 4%, as expected, but with a slim majority.
British Pound PRICE Today
The table below shows the percentage change of British Pound (GBP) against listed major currencies today. British Pound was the strongest against the New Zealand Dollar.
| USD | EUR | GBP | JPY | CAD | AUD | NZD | CHF | |
|---|---|---|---|---|---|---|---|---|
| USD | 0.07% | -0.07% | 0.00% | 0.06% | 0.31% | 1.23% | 0.00% | |
| EUR | -0.07% | -0.14% | -0.21% | -0.01% | 0.27% | 1.09% | -0.08% | |
| GBP | 0.07% | 0.14% | 0.00% | 0.13% | 0.35% | 1.14% | 0.07% | |
| JPY | 0.00% | 0.21% | 0.00% | 0.17% | 0.41% | 1.31% | 0.23% | |
| CAD | -0.06% | 0.00% | -0.13% | -0.17% | 0.28% | 1.17% | -0.06% | |
| AUD | -0.31% | -0.27% | -0.35% | -0.41% | -0.28% | 0.79% | -0.28% | |
| NZD | -1.23% | -1.09% | -1.14% | -1.31% | -1.17% | -0.79% | -1.14% | |
| CHF | -0.00% | 0.08% | -0.07% | -0.23% | 0.06% | 0.28% | 1.14% |
The heat map shows percentage changes of major currencies against each other. The base currency is picked from the left column, while the quote currency is picked from the top row. For example, if you pick the British Pound from the left column and move along the horizontal line to the US Dollar, the percentage change displayed in the box will represent GBP (base)/USD (quote).
Daily digest market movers: Pound Sterling outperforms US Dollar, JH Symposium eyed
- The Pound Sterling recovers to near 1.3500 against the US Dollar (USD) on Wednesday after the release of the hot UK CPI report for July. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, trades almost flat during the European session after posting a fresh weekly high near 98.00 earlier in the day.
- The US Dollar trades broadly firm as investors worry that Federal Reserve (Fed) Chair Jerome Powell could reiterate a restrictive monetary policy guidance in his speech at the Jackson Hole (JH) Symposium, which is scheduled for Friday.
- Jerome Powell has been arguing against any need for monetary policy adjustments, citing that the United States (US) central bank is still gauging the likely consequences of President Donald Trump’s tariff policy on inflation and the economy.
- The latest US CPI report for July showed a limited impact of tariffs on inflation; however, the Producer Price Index (PPI) report for the same month signaled that business owners are passing the impact of additional import duties to consumers.
- According to the CME FedWatch tool, there is an almost 85% chance that the Fed will cut interest rates by 25 basis points (bps) to the 4.00%-4.25% range in the September meeting.
- This week, investors will also focus on the preliminary UK-US S&P Global Purchasing Managers’ Index (PMI) data for August, which will be published on Thursday.
- In Wednesday's session, investors will pay close attention to Federal Open Market Committee (FOMC) minutes for the July policy meeting. In the policy meeting, the Fed kept interest rates steady in the range of 4.25%-4.50% and guided that a “wait and see” approach is optimal amid less clarity over the likely consequences of tariffs on inflation and the economy.
- On the global front, a trilateral summit is expected between US President Trump, Russian President Vladimir Putin, and Ukrainian President Volodymyr Zelenskyy for further discussions about ending the war in Ukraine. Leaders are expected to meet in Budapest to discuss concessions for the Russia-Ukraine truce, according to a report from Politico.
Technical Analysis: Pound Sterling finds buyers' interest near 20-day EMA
The Pound Sterling bounces back sharply after a corrective move to near the 20-day Exponential Moving Average (EMA) around 1.3465 on Wednesday, suggesting buying interest at lower levels.
The 14-day Relative Strength Index (RSI) strives to break above 60.00. A fresh bullish momentum would emerge if the RSI breaks above that level.
Looking down, the August 11 low of 1.3400 will act as a key support zone. On the upside, the July 1 high near 1.3790 will act as a key barrier.
Inflation FAQs
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%.
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.
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.
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.