The GBP/USD exchange rate quickly gave back short-term gains in mid-week trading after the Office for National Statistics (ONS) indicated that inflation-taking could leak from a lantern in London with the May consumer prices result worrying the Bank of England. This would have downward effects on the pound sterling.
During yesterday's trading, the price of the GBP/USD currency pair jumped towards the resistance level 1.2802. It quickly collapsed amid selling operations with losses towards the support level 1.2692, and settled around the level of 1.2770. This was in the beginning of trading today, Thursday, before the event of the Bank of England policy update, which usually has a response on sterling pairs.
Sterling prices tumbled after UK inflation figures from the Office for National Statistics confirmed the “terms of trade shock” that often turns into a domestic inflation problem. Inflation was unchanged at 8.7% last month when polls of economists indicated a market consensus in favor of a decline to 8.4% but more importantly the core inflation rate and its increase from 6.8% to 7.1% in May, the second consecutive record.
“This is a disaster,” says Lewis Shaw, founder of Shaw Financial Services. "This spells terrible news for the real estate market because the Bank of England will be under tremendous pressure to raise interest rates today," he adds.
Officially, core inflation fell from an October 2022 peak of 6.5% to 5.8% in January 2023, but has since reversed upward, often seen as a better measure of inflation generated by the domestic economy to ignore the prices of items such as energy, food, alcohol, and tobacco. The economic data appears at first to suggest that the Bank of England may have been too optimistic when it predicted in May that inflation would fall to around 7% by July and close to 4% by the end of the year, but some economists say it could still come down significantly. severe in the coming months.
Overall, the speed of inflation declines may depend on whether companies make more attempts to rebuild profit margins that were badly hit during the invasion of Ukraine last year, although there are a number of reasons why this risk is high. These include wage pressures within the labor force as the relative price of skilled labor was lowered by a nearly 10% increase in the national minimum wage in April, as well as a multiple of double the Bank of England rate increases which has sharply raised mortgage costs since December 2021.
Recent inflation appears to stand the British economy in contrast to its more comparable peers, while fears of a “wage price inflation spiral” or spiral of price and wage inflation are now spreading over the more than decade-old period during which labor force income growth diverged and some basic costs of living increased significantly. The data however leaves the Bank of England facing a very difficult monetary policy decision on Thursday when many economists expect it to raise the bank rate from 4.5% to 4.75% in what could be its 13th increase. However, it is not clear why after 12 previous increases, A further 25 basis point increase in the Bank rate is expected to lower inflation if the headline measure is no longer declining and the core inflation rate resumes along the path of its previous rise.
Sterling forecast against the dollar today:
- The GBP/USD price moved below the support level 1.2680, a first breach of the bullish trend, which emerged strongly recently.
- It moved the currency pair above the resistance 1.2840, its highest in 14 months.
- At that time, I preferred selling to reap profits, as these gains were sufficient to push the technical indicators towards strong overbought levels.
In the event that the interest rate hike from the Bank of England came without the market's aspirations, or the bank's policy statement came in a less hawkish tone, the bears may find the opportunity to test stronger support levels at 1.2600 and 1.2530, respectively.
On the other hand, over the same time period, in the event that the bank’s tone is very strict, the bulls may find a good opportunity to push the sterling-dollar pair towards the psychological resistance level of 1.3000 at the earliest.
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