Sterling strengthens after UK economy grew as expected in Q2

• Sterling moves higher as UK GDP growth for the second quarter was in line with estimates.
• The reduction in UK services inflation has come as a big relief to BoE policymakers.
• A moderate pick-up in US inflation set the stage for a Fed rate cut in September.

The British pound (GBP) is showing a strong performance against its major peers, except for the Australian dollar (AUD), in the Thursday session in London. The British currency continues to rise as the Office for National Statistics (ONS) in the United Kingdom (UK) reported that the economy expanded as expected in the second quarter of this year.

The Gross Domestic Product (GDP) flash report showed that the UK economy grew by 0.6% and 0.9% quarter-on-quarter and year-on-year respectively. The pace at which the economy grew in the second quarter was somewhat slower than the pace of growth in the January-March period, but still robust. The UK economy was flat in June compared to the previous month, as expected.

A decent growth rate and downward price pressures are a big relief for Bank of England (BoE) policymakers, who have worried that keeping interest rates higher for longer due to stubborn inflation could escalate the burden households and the economy in general.

On Wednesday, the consumer price index (CPI) report for July showed that the core CPI – which excludes volatile items such as food, energy, alcohol and tobacco – decelerated at a faster-than-expected pace to 3.3 % from estimates of 3.4% and June’s figure of 3.5%. This decline in core inflation was driven by a sharp decline in price pressures in the services sector as wage growth slowed.

This drop in inflation has driven expectations of a sequential rate cut by the BoE in September. Markets had a 44% chance of a quarter-point BoE rate cut, up from 36% before the data, Reuters reported.

Apart from monthly and Q2 GDP, the ONS also reported factory data for June. The report showed that monthly industrial and manufacturing output rose at a robust pace of 1.1 percent and 0.8 percent, respectively, while investors had forecast only marginal growth. On the year, industrial and manufacturing output contracted at a slower pace of 1.4% and 1.5% respectively.

Daily Market Reasons: Sterling Beats Majors

• The British pound is strengthening against the US dollar (USD) in European trading hours on Thursday. GBP/USD is capitalizing on the US dollar’s weak performance as the Federal Reserve’s (Fed) interest rate cuts in September took center stage after the United States (US) CPI report for July showed that price pressures are about to return to the desired rate. of 2%.
• The US Dollar Index (DXY), which tracks the greenback against six major currencies, is pulling back slightly after hitting a new weekly low of 102.20. Wednesday’s CPI report showed that inflationary pressures rose moderately, as expected. This boosted confidence that the Fed will take a dovish decision and go for its first interest rate cut in more than four years. However, traders remain divided on the extent to which loan rates will be reduced.
• Confidence in a rate cut by the Fed in September was further bolstered by dovish guidance from Atlanta Fed President Raphael Bostic after the release of inflation data. Bostic said in an interview with the Financial Times (FT) that he was comfortable with September rate cuts. Asked about the size of the rate cut, Bostic said he is open to half a point if the labor market deteriorates further.
• In Thursday’s session, investors will focus on monthly US retail sales data for July, which will be released at 12:30 GMT. Economists estimated that sales at retail stores rose 0.3 percent after being flat in June. Data on retail sales, a key measure of consumer spending, will be closely watched by investors as it will provide fresh clues about the outlook for inflation and the state of the US economy.

Technical Analysis: Sterling is aiming to bounce back to a two-week high of 1.2870

Sterling is moving higher to recapture a two-week high of 1.2870 against the US dollar. 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 a 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 lows lower. This generally leads to 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 round level resistance at 1.2900 and the psychological figure at 1.3000 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 the June 27 low of 1.2613, followed by the April 29 low of 1.2570.