Sterling gains on focus on UK-US inflation

• Sterling is moving higher against the US dollar on improving market sentiment.
• BoE’s Mann warns of rising risks of price pressures.
• The Fed is expected to cut interest rates by 25 bps in September.

The British pound (GBP) gains against its major peers, except the Australian dollar (AUD) and the New Zealand dollar (NZD), in the Monday session in London. The British currency strengthened as investors focused on United Kingdom (UK) employment data for the three months to June and consumer price index (CPI) data for July, due on Tuesday and respectively Wednesday.

The UK employment report is expected to show the IOM unemployment rate rose to 4.5% from the previous publication of 4.4%. Investors will also focus on data on average earnings without bonuses, a key measure of wage growth that has been a key driver of high inflation in the services sector. The measure of wage growth is estimated to have decelerated significantly to 4.6% from the previous reading of 5.7%. An expected drop in wage growth measures will raise expectations of further interest rate cuts by the Bank of England (BoE).

While UK wage growth is expected to moderate significantly, Catherine Mann, a member of the BoE’s Monetary Policy Committee (MPC), said on an Economics Show podcast with the Financial Times during Asian hours on Monday : “Prices for goods and services were set to rise again, and wage pressures in the economy could take years to dissipate.” Mann remained concerned about rising inflation risks despite annual inflation returning to the bank’s 2% target.

Daily Market Moments: Sterling Ahead of Busy UK Data Week

• The British pound is rising against the US dollar (USD) in European trading hours on Monday. The GBP/USD pair is gradually rising due to a steady market sentiment. The US Dollar Index (DXY), which tracks the value of the greenback against six major currencies, continues to strengthen above 103.00.
• The current market sentiment shows a constant appetite for risk; however, volatility is around the corner as United States (US) CPI data for July is scheduled to be released on Wednesday. Inflation data will significantly influence market expectations for Federal Reserve (Fed) interest rate cuts this year.
• Economists expect the monthly headline and core CPI, which excludes volatile food and energy prices, to rise 0.2 percent. Annual headline and core inflation are expected to decelerate by 10 bps to 2.9% and 3.2% respectively.
• According to the CME FedWatch tool, data on 30-day Federal Funds futures prices show traders see a 46.5% chance that interest rates will be cut by 50 basis points (bps) in September. The probability of a 50bp rate cut has dropped significantly from 85% a week ago. A sharp decline in a short time without the release of top-line data suggests that the strong likelihood of large rate cuts driven by weak US employment data for July, which reinforced fears of a potential recession, was a mere overreaction.
• Meanwhile, Fed policymakers’ confidence that price pressures are on track to return to the desired 2% rate has risen. Speaking at the Kansas Bankers Association on Friday, Fed Governor Michelle Bowman said: “If incoming data continue to show that inflation is moving sustainably toward our 2 percent objective, it will become appropriate to gradually lower the federal funds rate to preempt monetary policy. becoming excessively restrictive in terms of economic activity and employment.” She added: “But we must be patient and avoid undermining continued progress in reducing inflation by overreacting to any single data point,” Reuters reported.

Technical Analysis: Sterling bounces back from 1.2700

Sterling is recovering from a positive divergence formation on a daily time frame where the asset continues to make higher lows while a momentum oscillator makes lower lows. This generally results in a resumption of the uptrend, but should be confirmed with more indicators.

The 14-day Relative Strength Index (RSI) indicator is finding a cushion near 40.00, showing signs of buying interest at lower levels.

The pair continues to hold the 200-day exponential moving average (EMA), which is trading around 1.2650.

More downside could come if GBP/USD breaks below Thursday’s low of 1.2665. This would expose the June 27 low at 1.2613, followed by the April 29 high at 1.2570.

On the other hand, a recovery move above the August 6 high at 1.2800 would take the pair towards the August 2 high at 1.2840 and round level resistance at 1.2900.