Pound Sterling turns subdued as high inflation dampens outlook
- Pound Sterling attempted a recovery as the UK’s inflation report turned out stickier than anticipated.
- UK’s headline and core inflation landed higher than expectations at 6.7% and 6.1% respectively.
- The market sentiment remains risk-off ahead of US President Joe Biden’s visit to Israel.
The Pound Sterling (GBP) faced selling pressure near 1.2200 after a recovery attempt prompted by the United Kingdom inflation data. The Office for National Statistics (ONS) reported that inflation in September remained marginally higher than expectations. The GBP/USD pair could come out of the woods as the stalled inflation report would elevate risks of further policy-tightening by the Bank of England (BoE) in the November monetary policy meeting.
A sticky Consumer Price Index (CPI) would cast doubts on whether UK Prime Minister Rishi Sunak stick to his promise of halving inflation to 5.5% by the year-end. The consequences of high inflationary pressures are expected to dampen the UK’s housing sector further, which has been struggling for a firm footing due to elevated borrowing costs.
Daily Digest Market Movers: Pound Sterling remains subdued ahead of Fed Powell's speech
- Pound Sterling finds buyers’ interest as the UK Office for National Statistics (ONS) has reported a sticky inflation report for September month.
- The monthly headline inflation grew at a higher pace of 0.5% against expectations of 0.4% and the former pace of 0.3%. Annual headline CPI data grew steadily by 6.7%, higher than the estimates of 6.5%.
- The core inflation data that excludes volatile food and oil prices expanded by 6.1% from the consensus of 6.0% but slowed from the August reading of 6.2%.
- Producers pushed prices of goods and services at factory gates by 0.4% against the expectations and the former release of 0.9% and 0.8% respectively.
- A stubborn inflation report is expected to bring discomfort for BoE policymakers, who are constantly working on bringing down inflation to 2%.
- On Tuesday, partial labor market data built pressure on the Pound Sterling. The ONS reported soft wage data while Employment numbers were postponed to October 24.
- Three month-to-August Average Earnings excluding bonuses softened to 7.8% as expected from the former release of 7.9%. In the same period, the Average Earnings data including bonuses decelerated to 8.1% from the consensus of 8.3% and the prior release of 8.5%.
- UK’s wage growth slowed for the first time since January as the labor demand is not strong anymore due to declining demand in the domestic and overseas markets.
- Bank of England (BoE) policymaker Swati Dhingra commented after the release of the soft wage report that the labor market is loosening and she doesn't see further wage growth momentum. Last week, Dhingra said that the central bank could look for rate cuts if the growth rate remains below expectations.
- The consequences of higher borrowing costs due to elevated interest rates by the BoE have heavily impacted the property sector. UK’s property website Rightmove said on Tuesday that the asking price for homes rose at the slowest pace since 2008, indicating that higher mortgage rates have slowed the housing demand.
- The market mood remains cautious as investors are worried about the conclusion of US President Joe Biden’s visit to Israel. US Biden will discuss with Israel Prime Minister Benjamin Netanyahu over carrying out ground assault in Gaza. This could result in an intervention of more Middle-East players, which could elevate conflicts.
- The US Dollar Index (DXY) remains sideways near 106.00 despite robust Retail Sales data for September.
- US Retail Sales expanded at a robust pace of 0.7%, boosted by higher automobile demand and spending on dining out. The economic data excluding automobiles rose by 0.6%, almost at a double pace from expectations.
- Meanwhile, investors await the speech from Federal Reserve (Fed) Chair Jerome Powell, scheduled for Thursday. It would be worth watching whether Fed Powell would join his teammates and favor an unchanged interest rate policy or will deliver hawkish guidance.
Technical Analysis: Pound Sterling upside remains restricted at 1.2200
Pound Sterling rebounds to near 1.2200 after the release of the sticky inflation report but remains inside the trading range of 1.2120-1.2270. The broader GBP/USD outlook remains weak as it faced selling pressure while attempting to shift above the 20-day Exponential Moving Average (EMA), which trades around 1.2240. The major trend is bearish as the Cable is trading below the 50 and 200-day Exponential Moving Averages (EMAs).
Inflation FAQs
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.
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.
