Sterling slips after weaker-than-expected UK data

• Sterling eases against the US dollar after UK inflation came in slightly weaker than expected.
• Easing price pressures in the UK make further interest rate cuts by the BoE more likely.
• Investors await US CPI data for July.

The British pound (GBP) is facing a strong sell-off against its major peers in the London session on Wednesday. The British currency weakens as the United Kingdom’s (UK) Office for National Statistics (ONS) reported a weaker-than-expected July Consumer Price Index (CPI) report, which boosted expectations of sequential interest rate cuts by to the Bank of England (BoE).

Annual CPI rose 2.2%, less than estimates of 2.3%, but accelerated after returning to the banks’ target of 2% in both May and June. In its forecasts, the BoE has already warned that headline inflation could rise again after returning to 2%. Compared to the previous month, the CPI decreased by 0.2%.

Core CPI, which excludes volatile items such as food, energy, alcohol and tobacco, slowed at a faster-than-expected pace to 3.3%, compared with an expected 3.4% and June’s figure of 3.5%. A sharp decline in core inflation was driven by slower growth in services inflation, which remained a major driver of price pressures in the UK economy. Inflation in the services sector eased to 5.2% from the previous release of 5.7%.

Price pressures in the services sector are driven mainly by strong wage growth, which also fell to a two-year low in the three months ended June. The employment report showed on Tuesday that average earnings excluding bonuses rose at a slower pace of 5.4 percent from 5.7 percent in the quarter ended in May. An overall decline in services inflation due to slower wage growth is expected to come as a big relief to BoE policymakers, who have worried that wage pressures could not be contained in the near term.

On Monday, Catherine Mann, a member of the BoE’s Monetary Policy Committee (MPC), warned that inflation remained persistent. “The prices of goods and services were set to rise again, and wage pressures in the economy could take years to dissipate,” Mann said.

Daily Market Reasons: Sterling Falls Against US Dollar Ahead of US Inflation

• Sterling fell to near 1.2820 against the US dollar (USD) during European trading hours on Wednesday. GBP/USD falls as the British currency weakens following the release of the UK’s weak inflation report. Meanwhile, the short-term outlook for the US dollar is also uncertain ahead of July US CPI data due at 12:30 GMT.
• The U.S. dollar index ( DXY ), which tracks the greenback against six major currencies, rose to near 102.67 in the European session on Wednesday, after correcting to a new weekly low of 102.55 on Tuesday.
• Annual US headline and core inflation are expected to have decelerated by a tenth to 2.9% and 3.2%, respectively, with the monthly figures up 0.2%. Data inflation will significantly influence market expectations for Fed rate cuts for the rest of the year.
• The US dollar saw a sharp sell-off on Tuesday after a largely weak producer price index (PPI) report for July raised market expectations that the Federal Reserve (Fed) will start cutting interest rates more aggressively.
• According to the CME FedWatch tool, 30-day Federal Funds Futures price data shows traders see a 54.5% chance that interest rates will be cut by 50 basis points (bps) in September. The probability of a 50 bps rate cut rose slightly after the PPI report was released, but is still significantly down from 69% a week ago.
• The PPI report showed headline producer inflation came in at 2.2 percent, lower than estimates of 2.3 percent and June’s reading of 2.7 percent. In the same period, the core PPI rose at a slower pace of 2.4%, from expectations of 2.7% and the previous release of 3%. A sharp decline in the pricing power of owners at the factory gates boosted investor confidence that inflation was on track to return to the desired 2 percent rate.

Technical Analysis: Sterling is down from a two-week high of 1.2870

Sterling slips to near 1.2820 against the US dollar after hitting a fresh two-week high of 1.2870. GBP/USD’s near-term appeal is still firm as it holds the 20-day Exponential Moving Average (EMA) which is trading around 1.2800.

Earlier, the cable showed a sharp recovery from the six-week low of 1.2665 after a positive divergence formation on a daily time frame, where the pair continues to make higher lows while the momentum oscillator makes lower lows low. This generally results in a resumption of the uptrend, but should be confirmed with more indicators.

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

On the upside, the August 2 high at 1.2840 and the round level resistance at 1.2900 will act as major resistances for the pound. Alternatively, the recovery move could weaken if the asset breaks below the August 8 low at 1.2665. This would expose the asset to a June 27 low of 1.2613, followed by an April 29 low of 1.2570.