Pound Sterling slumps on US stubborn Inflation data, focus shifts to UK CPI

Pound Sterling drops sharply as US Inflation data turns out stubborn.
The GBP[/USD pair fails to hold recovery despite upbeat UK labor market data, higher wage growth.
The growth in UK's average earnings was higher than expected, allowing BoE to maintain a hawkish narrative

Sagar Dua FXStreet

The Pound Sterling (GBP) falls vertically in Tuesday’s early New York session as stubborn United States Consumer Price Index (CPI) data for January has dampened market sentiment. The appeal for the GBP/USD has weakened ast he US Dollar has rallied as soft inflation data would allow the Fed to maintain a hawkish interest rate stance.

The GBP/USD pair surrendered gains inspired by upbeat United Kingdom upbeat employment data for the three months ending December, reported by the Office for National Statistics (ONS). The labor demand remains upbeat, and Average Earnings rose at a higher pace than the expectations of market participants.

Hiring from UK employers remained strong as business owners are optimistic about the economic outlook due to receding recession fears, easing price pressures, and hopes of rate cuts by the Bank of England (BoE).

While wage growth momentum was higher than market expectations, the pace was slower than readings in the three months ending November. This indicates that progress in the labor cost declining towards the required 2% target level has slowed. It suggests the BoE will be able to maintain an argument in favor of keeping interest rates at their current level for a more extended period. This has boosted the Pound Sterling as higher interest rates by the BoE tend to attract more foreign inflows.

Daily Digest Market Movers: Pound Sterling tumbles while US Dollar soars

Pound Sterling witnesses intense selling pressure on dismal market mood.
The GBP/USD pair fails to hold strength despite the United Kingdom ONS reporting an upbeat Employment data for three months ending December.
The Unemployment Rate falls significantly to 3.8% against expectations of 4.0% and the prior reading of 4.2%.
UK employers recruited 72K workers in December, similar to 73K labor additions in November.
In January, Claimant Count Change was higher at 14.1K against a 5.5K reading in December.
The reduction in Average Earnings (both with and without bonuses) for three months ending December was slower than expected, which is expected to allow Bank of England policymakers to push back expectations of early rate cuts.
Average Earnings Excluding Bonus' grew by 6.2% against expectations of 6.0% and the former release of 6.7% (revised from 6.6%). The economic data, including bonuses, rose at a higher pace of 5.8% against the consensus of 5.6% but remained slower than the prior reading of 6.7% (revised from 6.5%).
Going forward, investors will focus on the UK Inflation data for January, which will be published on Wednesday.
Meanwhile, the outlook for the US Dollar strengthens as inflation data remain hotter than expectations.
The US monthly headline and core inflation grew at a higher pace of 0.3% and 0.4% in January, respectively. Investors projected the headline and core inflation to rise steadily by 0.2% and 0.3%, respectively.
On an annualized basis, the core inflation rose steadily by 3.9% while investors anticipated a decline to 3.7%. The headline CPI at 3.1% was higher than expectations of 2.9% but lower than the prior reading of 3.4%.

Technical Analysis: Pound Sterling falls below 1.2600

Pound Sterling slips below 1.2600 as UK price pressures turn out sticker than expectations. The GBP/USD pair falls from a weekly high on dismal market mood. The asset fails to sustain above the 20 and 50-day Exponential Moving Averages (EMAs), which trades around 1.2636 and 1.2660, respectively. The 14-period Relative Strength Index (RSI) falls back to 40.00. A bearish momentum would emerge if the RSI (14) drops below 40.00.

(This story was corrected on February 13 at 12:37 GMT to say that "While wage growth momentum was higher than market expectations, the pace was slower than readings in the three months ending November." Not December as formerly written.")

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.

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