Pound Sterling soars to 1.2670 as soft US inflation boosts Fed rate-cut prospects
- The Pound Sterling jumps to 1.2670 amid uncertainty over BoE rate cuts and a soft US Dollar.
- Steady UK wage growth deepens fears of persistent inflationary pressures.
- The US Dollar weakens further after the expected decline in the US inflation data for April.
The Pound Sterling (GBP) posts a fresh monthly high at 1.2670 against the US Dollar (USD) in Wednesday’s American session. The GBP/USD pair soars as the US Dollar has been hit hard due to an expected decline in the United States Consumer Price Index (CPI) and stagnant Retail Sales data for April. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, drops sharply to near 104.50.
Monthly headline inflation rose at a slower pace of 0.3% from the estimates and the prior reading of 0.4%. The core CPI, which strips off volatile food and energy prices, slowed in line with estimates of 0.3% from the former reading of 0.4%. As expected, annual headline and core CPI softened to 3.4% and 3.6%, respectively. Monthly Retail Sales data that is an indicator of household spending, which can also give clues about the inflation outlook remained unchanged. However, investors forecasted the economic data to have grown at a slower pace of 0.4% from the prior reading of 0.6%, downwardly revised from 0.7%.
Soft inflation data is expected to positively influence speculation for the Federal Reserve (Fed) interest-rate cuts. Currently, financial markets expect that the Fed will choose the September meeting as the point to start lowering interest rates.
Daily digest market movers: Pound Sterling extends its upside on soft US CPI
- The Pound Sterling extends its winning spell for the third trading session on Wednesday. The Cable capitalizes on the soft US Dollar and uncertainty over when the Bank of England (BoE) will opt for interest-rate cuts. Currently, investors anticipate that the central bank will start to do so from the June meeting.
- The United Kingdom Employment report for the three months ending March, which was released on Tuesday, indicated that job market conditions deteriorated for the third time in a row. Due to rising joblessness, the Unemployment Rate rose to 4.3% as expected. Historically, easing labor market conditions boost expectations for the central bank to adopt a dovish stance on interest rates. However, the impact of this loosened labor market was offset by steady wage growth.
- BoE policymakers remain concerned over high service inflation as it could stall progress in the disinflation process. Services inflation is majorly driven by wage growth, which appears to be significantly stronger than what is required for inflation to return to the desired rate of 2%.
- After the labor market data, BoE Chief Economist Huw Pill commented: "Rates of pay growth remain quite well above what would be consistent for meeting the 2% inflation target sustainably." Pill emphasized the need to maintain a restrictive stance on monetary policy that continues to build downside pressure on domestic inflation. About rate cuts, Pill said that it is reasonable to believe that over the summer, “we will see enough confidence to consider lowering interest rates.”
Technical Analysis: Pound Sterling climbs to 1.2670
The Pound Sterling extends its upside to a monthly high at 1.2670. The GBP/USD pair strengthened after stabilizing above the major resistance plotted from December 8 low of 1.2500. The near-term outlook of the Cable has improved as it seems well-established above the 20-day Exponential Moving Average (EMA), which trades around 1.2540. The asset has retraced 61% losses recorded from a 10-month high at around 1.2900.
The 14-period Relative Strength Index (RSI) gradually approaches the 60.00 barrier. A decisive break above this level will trigger bullish momentum.
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.
Author
Sagar Dua
FXStreet
Sagar Dua is associated with the financial markets from his college days. Along with pursuing post-graduation in Commerce in 2014, he started his markets training with chart analysis.
