Sterling Faces Challenges as UK Inflation Surges

• UK inflation outpace expectations in June, putting pressure on the pound.
• Investors are shifting focus to the upcoming UK labor market data for the three months ending in May.
• The US CPI report indicates that tariffs are affecting consumer prices.

The Pound Sterling (GBP) is set to experience increased activity against major currencies following the release of unexpectedly high UK Consumer Price Index (CPI) data in June.

The Office for National Statistics (ONS) revealed that the annual headline inflation rate has risen to 3.6%, its highest since January 2024. Economists had projected a more moderate increase to 3.4%. The CORE CPI, which excludes unstable items like food and energy, rose to 3.7%, surpassing expectations and previous figures of 3.5%. Over the month, headline CPI saw a rise of 0.3%, which is above the anticipated 0.2%.

Additionally, inflation in the services sector, which is closely monitored by the Bank of England (BOE), increased by 4.7%.

Such signals of increasing price pressures may prompt the BOE to advocate for a continued restrictive monetary policy. However, they also have to carefully consider the implications on interest rates ahead of the August policy meeting, particularly amid rising prices and a cooling labor market.

The unexpectedly high inflation figures in the UK are likely to compel the central bank to reassess any assumptions regarding interest rate cuts for the remainder of the year. Prior to the UK CPI data release, market confidence in rate cuts during the next policy meeting next month was strengthening.

Investors are also awaiting labor market data for the three months ending in May, due for release on Thursday, to gain further insights into the employment situation. Prime Minister Rachel Reeves’ raised employer contributions to the Social Security Program has led to muted job growth. The latest survey by the Recruitment and Employment Union Trade Organization and accountants KPMG indicates a noticeable increase in job availability.

Daily Digest Market Mover: Pound Sterling vs US Dollar

• The Pound Sterling (GBP) is expected to break an eight-day streak of losses against the US Dollar (USD) during the European trading session due to the hot UK CPI report, with a rebound to nearly 1.3400. This move is supported by indications that the tariffs imposed by President Trump have started impacting prices, even in a robust dollar environment.
• The recent US CPI report showed that producers are now passing on the effects of Trump’s tariffs to consumers. The report indicated an acceleration in the headline CPI to 2.7%, faster than the previous 2.4% readings.
• Market analysts caution that price pressures may increase further due to upcoming tariffs set to take effect on August 1, leaving the Federal Reserve in a position where they may require more time to fully assess the impact before adjusting monetary policy. An analyst from Oxford Economics noted that if the new tariffs are implemented, it could take months before consumers feel the full inflation effects.
• This prospect has shifted trader sentiments away from expecting dovish actions from the Fed. According to the CME FedWatch tool, the likelihood of an interest rate cut by the Fed in September dropped to 55.5% from 64.7% a week earlier, with the market anticipating stability in the 4.25%-4.50% range during future meetings.
• President Trump has introduced additional tariffs on 22 countries, notably Japan, South Korea, and the European Union, as part of actions taken during a trade agreement pause. Meanwhile, limited agreements have been reached with countries like the UK, Vietnam, Indonesia, and China, with Trump expressing optimism about a prominent trade deal coming together soon.

Technical Analysis: Revisiting Pound Sterling

The Pound Sterling encountered a seven-week low near 1.3370 before recovering to approximately 1.3400 against the US dollar. Recent trends in the GBP/USD pairing have turned bearish as it has fallen below the 20-day and 50-day exponential moving averages around 1.3540 and 1.3470, respectively.

The 14-day relative strength index (RSI) currently sits below 40; traditionally, when the RSI dips below this mark, it indicates a rise in bearish momentum.

On the downside, the May 12 low at 1.3140 presents a significant support level, while the July 11 high creates an obstacle around 1.3585.

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