- Pound Sterling drops as market mood turns downbeat.
- The UK employment and inflation data will be the major triggers in the week ahead.
- January’s US inflation data will keep the US Dollar on its toes.
The Pound Sterling (GBP) drops vertically amid dismal market sentiment in Monday’s European session. The GBP/USD pair is expected to remain volatile as investors await the United Kingdom employment and the United States Consumer Price Index (CPI) data on Tuesday.
UK Average Earnings will be in focus as Bank of England (BoE) Deputy Governor Sarah Breeden said last week that the longevity of higher interest rates will be based on how price pressures and wage growth data evolve.
If wage growth momentum remains strong, the BoE will need to keep interest rates elevated to combat inflation, which will actually be positive for Pound Sterling as higher interest rates attract more foreign capital inflows.
In today’s session, a speech from Bank of England Governor Andrew Bailey will be keenly watched, and could set a fresh tone for March’s monetary policy meeting. In the last monetary policy statement, Bailey pushed back on rate-cut expectations amid low confidence that inflation will soon return to its 2% target.
Daily Digest Market Movers: Pound Sterling drops on dismal market mood
- Pound Sterling falls from fresh weekly high around 1.2650 ahead of a speech by Bank of England Governor Andrew Bailey.
- Last week, BoE Deputy Governor Sarah Breeden and Chief Economist Huw Pill said the focus is now on how long interest rates will remain restricted. They ruled out fears of further policy tightening.
- BoE policymakers, Jonathan Haskel and Catherine Mann warned that upside risks to price pressures supported the case for keeping interest rates restrictive for longer.
- The Pound Sterling is expected to remain volatile amid a data-packed week. Employment, inflation, quarterly Gross Domestic Product (GDP) and Retail Sales data are lined-up for release.
- Labor market data is scheduled for Tuesday. The Unemployment Rate for three months ending December is expected to drop to 4.0% from a former reading of 4.2%.
- Price pressures in the United Kingdom region are most stubborn in comparison with other Group of Seven economies due to higher wage growth and service inflation. Therefore, Investors will keenly focus on the Average Earnings data.
- Investors anticipate that wage growth excluding bonuses will decelerate to 6.0% in three months ending December against the former reading of 6.6%. In the same period, Average Earnings including bonuses are forecast to have grown at a slower pace of 5.7%.
- Slower wage growth momentum would offer some relief to BoE policymakers and will increase hopes of an early rate-cut.
- Meanwhile, the US Dollar Index (DXY) has discovered interim support near 104.00. The market mood is is downbeat as United States inflation data for January looming large, which will be published on Tuesday.
- US headline inflation is forecast to have grown at a slower pace of 3.0% against 3.4% in December. In the same period, core inflation that excludes volatile food and Oil prices is forecast to have decelerated slightly to 3.8% from 3.9%.
- The appeal for the US Dollar would drop if the inflation data eases further.
Technical Analysis: Pound Sterling falls to near 1.2600
Pound Sterling trades in a range of 1.2580-1.2640 from the past three trading sessions. The GBP/USD pair demonstrates a sharp volatility contraction ahead of the crucial economic events. The 50-day Exponential Moving Average (EMA) around 1.2630 is acting as a barricade for the Pound Sterling bulls.
The 14-period Relative Strength Index (RSI) oscillates in the 40.00-60.00 range, indicating a probable consolidation ahead.
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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