The recent British economic data, especially with regard to inflation, raised expectations to force the Bank of England to raise interest rates, but the British Pound did not benefit from that.
- The GBP/USD currency pair remained on the cusp of psychological support 1.2000.
- The currency pair is stable around the 1.2050 level at the time of writing the analysis.
- Rising UK inflation is sending the pound higher against the euro and dollar, but that's not good news.
- Sterling was higher after the UK inflation was announced at 10.1% in July - exceeding economists' expectations by a significant amount - leaving it more than five times above the BoE's target.
The new inflation rate to a 40-year high means the bank is likely to rise by 50 basis points in September. For its part, the Office for National Statistics said that inflation in the UK rose to 10.1% on an annual basis in July, ahead of expectations of 9.8% and 9.4% in June. Core inflation rose 6.2% on an annual basis, ahead of expectations of 5.9% and 5.8% in June. Commenting on the figures, Hussain Mahdi, analyst at HSBC Asset Management, said: "Inflation continues to rise without expecting a halt in the coming months with higher household energy bills and continued service inflation supported by the continued resilience in the labor market."
The initial reaction from sterling has been to rally, a traditional and probably unexpected reaction driven by algorithms. But the gains were soon given up, confirming that this inflation was a bad surprise for the British economy. The Bank of England will have to act decisively and introduce further rate hikes that will constrain the economy to the point of entering a recession, something the Bank expects to happen early in the year.
The ONS said rising inflation reflected higher prices across many parts of the measuring basket, underscoring an increasingly entrenched problem for the Bank of England. The Bank of England itself expects inflation to reach a top of 13% by the end of the year, and with another rise in energy costs in October, this seems easy to achieve.
“The key rate will then rise to around 13% in October, when Ofgem will increase the default tariff rate ceiling by about 80%,” says Samuel Tombs, chief UK economist at Pantheon Macroeconomics.
How does inflation affect GBP/USD?
Sterling is usually expected to be supported by the possibility of higher interest rates, as this indicates higher returns on UK monetary assets for foreign investors. But high inflation and stagnant economic growth are potential major headwinds for the currency. Therefore, although the currency's initial response has been on the rise, the long-term outlook is certainly challenged, and the British currency is likely to incur losses in the future, particularly against the US dollar.
Meanwhile, the Euro appears to remain under pressure as the UK and Eurozone face similar inflationary challenges for energy leadership. Continued declines in global oil prices and declines in auto fuel prices were not reflected in the July inflation data, but they will soon begin to show and cap the headline inflation rate. Meanwhile, broader inflationary pressures are expected to decline sharply towards the end of the year.
Today's forecast for the GBP/USD pair:
There is no change in my technical view of the performance of the GBP/USD currency pair. The stronger bearish trend and the test and breakout of the psychological support 1.2000 increases the bears' control over the trend. Breaking the support will open the way to test stronger support levels, the most important of which are 1.1935 and 1.1880, respectively. On the other hand, on the daily chart, there will be no breach of the current trend without moving towards the 1.2330 resistance level. I still prefer to sell the GBP/USD from every ascending level.
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