GBP/USD Rises, Sticky UK Inflation Says BoE Has More To Do

GBP/USD Price, Chart, and Analysis

• GBP/USD rose and stayed up after the latest official UK consumer price numbers
• Headline CPI is decelerating but remains hugely above target
• The prospect of higher rates next month remains

The British Pound rose against the United States Dollar on Wednesday as the latest official inflation report did nothing to allay suspicions that the Bank of England will be raising interest rates yet again, probably as soon as next month.

While July’s headline 6.8% annualized Consumer Price Index rise was much lower than June’s 7.9%, it was exactly as markets had expected and, crucially, still more than three times the BoE’s 2% target rate. That hasn’t been hit since 2021.

For sure there were crumbs of comfort in the numbers. That headline rate was a seventeen-month low and the nightmare days of late last year, when inflation was printing double digits, seem to be over.

However, the ‘core’ inflation rate, which strips out the volatile effects of food and fuel prices, was stickier than the headline. It came in at 6.9%, a tick above forecasts and unchanged from June.

The message in the data seemed clear enough for a country that has already struggled longer and harder with inflation than most comparable economies: price-rises are decelerating, but they’re not doing so fast enough. That in turn strongly suggests that the monetary screws will have to be tightened again, after fourteen consecutive monthly interest-rate increases so far which have taken the key Bank Rate up to 5.25%.

Moreover, the figures followed extremely strong wage data released on Tuesday. They suggest that ‘cost push’ inflation remains a huge factor in overall price rises, even as past inflationary bugbears such as fuel prices relax a little.

The BoE’s Monetary Policy Committee expects to see inflation falling to 4.9% by the end of this year, according to its last forecasts, but markets will be very interested to see how the latest numbers fit with that view. They’ll have a bit of a wait to find out, as UK borrowing costs won’t be reviewed again until September 21.

Still, hopes for another increase have kept Sterling bid, with the UK economy’s surprising resilience also helping. The Pound has risen quite consistently against the greenback since last September, largely on the thesis that the BoE has more heavy-lifting work ahead of it than the Fed if it’s going to bring inflation to heel. It’s safe to say that thesis has survived Wednesday’s inflation figures.

It’s been a busy week for UK data, but GBP/USD is likely to be dominated by economic events across the Atlantic, at least until Friday when official retail sales numbers will shine more light on the Pound’s domestic economy.

GBP/USD Technical Analysis

GBP/USD Daily Chart Compiled Using TradingView

GBP/USD remains well short of July’s fifteen-month highs and, perhaps more worryingly for Sterling bulls, below an important trend line previously in place since the lows of September last year.

However, the Pound hasn’t fallen very far from those peaks, and it remains comfortably above even the first Fibonacci retracement of the rise up from those September lows to that July peak. That comes in at 1.24837.

In the near term the pair faces resistance at 1.2770. It will take a convincing and sustained break of that to power it back above that trend line which now provides resistance at 1.29816.

The outlook for this pair is a little ill-defined at present, but the fact that it’s below both its 50 and 100-day moving averages suggests that some caution is due for sterling bulls, at least in the near term. The Pound could also be very close to forming a ‘head and shoulders’ on the daily chart, which would suggest that it had topped out significantly with that July rise.

The uncommitted may be well advised to wait and see whether the pair can hold above its retracement levels as convincingly in the week ahead.

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–By David Cottle for DailyFX