Pound Sterling refreshes weekly high as inflation outlook remains stubborn

The Pound Sterling (GBP) comes out of the woods and refreshes weekly high due to expectations of more interest rate hikes from the Bank of England (BoE). The GBP/USD pair manages to come out of Wednesday’s range ahead of the British Retail Sales data for July. The release of the entire economic indicators will provide lucid guidance to investors about further policy action.

Bets in favor of a hawkish BoE interest rate decision for the September policy meeting rose sharply as the United Kingdom’s strong wage growth and stubborn core inflation makes further policy tightening more necessary. Meanwhile, Friday’s Retail Sales data is expected to demonstrate a slowdown in consumer spending momentum due to wet weather.

Daily Digest Market Movers: Pound Sterling jumps ahead of UK consumer spending data

• Pound Sterling demonstrates a squeeze in volatility above 1.2700 as sticky core inflation and a disappointing labor market deepen recession fears.
• Headline CPI for July softened in line with expectations, but stubborn core inflation discomforted Bank of England policymakers.
• Core inflation is marginally lower at 6.9% than its recent peak of 7.1%, which indicates that UK PM Rishi Sunak could fail to fulfill his promise of halving inflation to 5%.
• UK’s headline inflation contracted in June due to a sheer decline in gas prices. Fuel sellers passed on the benefit of lower oil prices to end consumers.
• Last month, BoE Governor Andrew Bailey warned fuel sellers for overcharging customers.
• The decline in UK headline inflation was also contributed by easing grocery inflation. The economic data eased for a fifth straight month, softening to 12.7% through August 6 vs. the former print of 14.9%.
• Considering strong wage growth and stubborn core inflation, the BOE will continue tightening interest rates further to restrict inflationary pressures.
• Individuals paying shelter rents are expected to face more outflows as demand for new homes dropped sharply due to rising borrowing costs.
• After inflation and employment data, investors shift their focus toward the Retail Sales data for July, which will be published at 06:00 GMT.
• Per estimates, monthly Retail Sales contracted by 0.5% due to wet weather versus an expansion of 0.7% in June. Annual economic data contracted sharply to 2.1% against June’s print of -1.0%.
• Ex-fuel Retail Sales are seen contracting at a higher pace, which indicates that consumer spending on durables and non-durables, was extremely weak.
• Meanwhile, the market mood is quite jittery as the economic outlook for China remains bleak due to poor demand and weak exports. Western nations are lowering their dependency on China for input.
• Investment banking firm Morgan Stanley lowered its forecast of China’s Gross Domestic Product (GDP) for the current year to 4.7% vs. an earlier projection of 5.0%.
• The US Dollar Index (DXY) prints a fresh seven-week high at 103.60 as fears of a recession in developing nations deepen.
• Rising expectations of further policy tightening by the Federal Reserve (Fed) as Federal Reserve (Fed) policymakers see significant upside risks to inflation, infusing strength in the US Dollar.
• Federal Open Market Committee (FOMC) minutes delivered a clear message that the inflationary environment is still uncertain and further policy action will be more dependent on the incoming data.
• On Wednesday, the US housing market showed a significant jump in nuclear family homebuyers by 3.9% against the forecast of 2.7%. In addition, future construction approvals rose nominally despite rising borrowing costs.

Technical Analysis: Pound Sterling fails to test 1.2800

Pound Sterling looks well-established above the crucial support of 1.2700. However, further action is uncertain as investors seem baffled between hawkish BoE bets and deepening recession fears. The asset is consistently facing offers near the 50-day Exponential Moving Average (EMA) while the 20-day EMA is still trading higher. Broadly, the Cable is oscillating in a range of 1.2620-1.2770 and trades inside the previous day’s range.