Sterling’s Gains Pause After Mixed Data

The pound’s latest gains against most currencies except the yen were retraced somewhat in the aftermath of this week’s releases although sentiment is still good on the whole and the new British government has been received positively so far. The probability of a cut by the Bank of England (‘the BoE’) next month has also declined after inflation. This article summarises recent data and sentiment affecting the pound and looks briefly at the charts of GBPUSD and EURGBP.

Annual inflation in the UK was stable in June compared to May, with only the monthly figures showing declines. Although the consensus pointed to a slight decline by the annual headline figure to 1.9%, it stayed at 2%:

This is exactly on the BoE’s usual target of 2%, but the central bank doesn’t seem keen to pat itself on the back and start cutting rates just yet. Much like the Fed, policymakers will remember the mistakes of the late 1970s as rates were cut too early and inflation resurged. The BoE has highlighted persistently high service inflation, currently at 5.7%, and strong growth in average wages although this has moderated somewhat in recent months.

The probability of a cut by the BoE at its next meeting on 1 August has declined to around 33%; it had been about 50% before the latest release of inflation. This doesn’t necessarily mean no cut next month but the lack of very important data in the next fortnight means that loosening policy immediately is unfavourable.

The British job report on 18 July was overall slightly negative. Claimants increased by about 10,000 more than expected, showing a significant uptick in the last two months, but unemployment (for May, not June) remained at 4.4%:

The rate of unemployment has now held at 2021’s highs for two months. This is a pretty normal situation in the environment of restrictive monetary policy and overall slow growth compared to the immediate recovery from Covid. For now, there’s no clear pressure on the BoE to cut rates from the job market while the minor technical recession in the UK ended last quarter.

Sentiment on the British economy is generally quite optimistic. The incoming Labour government outlined a range of sensible measures during the king’s speech earlier this week and attention has been focussed on how growth might increase as a result of new construction and infrastructure. The honeymoon for the new government might last for a while; drastic changes to policy such as a significant realignment of the current trade deal with the EU would probably take a long time. The focus of traders is likely to remain on monetary policy, inflation, jobs and GDP throughout the summer.

Cable, Daily

The dollar has declined across the board with few exceptions in recent weeks after lower inflation in the USA and increasing expectations that the Federal Reserve might cut three times before the end of the year. Recent developments in American politics haven’t had a clear effect on forex, but traders will continue to monitor polling as the presidential election approaches in November.

The ascending triangle on the chart would typically suggest an upward breakout at completion, but the context of very high momentum relative to a forex pair and strong buying saturation make that questionable. The price has extended quite far beyond all of the moving averages and might be expected to retrace before another aggressive move up. $1.30 is a critical resistance which hasn’t clearly been broken yet, so after a somewhat weaker job report it might be possible to see an extended retracement or consolidation before any other possible move up.

More insight might come from British retail sales early on Friday 19 July. 25 July’s advance GDP for the second quarter in the USA is the critical release next week.

Euro-pound, Daily

The European Central Bank (‘the ECB’) left its main rates on hold on 18 July as widely expected. Although participants seem to be expecting one or two more cuts before the end of the year, the central bank itself doesn’t have a clear intention for September’s meeting. The main reason for the ECB’s reservation is that isn’t not clear yet whether inflation is declining quickly enough to justify further cuts when, at least for now, growth isn’t a major concern.

Relative to a major pair, euro-pound has been in a fairly consistent downtrend since late April and touched 10-month lows below 84p on 14 July. As for cable, though, immediate continuation is questionable due to the oversold signal from the slow stochastic. This indicator recently completed a crossover of the main line above the signal line within oversold, suggesting a bounce. ATR has also declined significantly since the middle of last month.

Probably the most important data next week for EURGBP are Wednesday’s German consumer confidence and PMIs. In the absence of any very major releases until national and eurozone-wide GDP on 30 July, the overall downtrend might continue after a possible short-term bounce.

This article was submitted by Michael Stark, an analyst at Exness.

The opinions in this article are personal to the writer. They do not reflect those of Exness or FX Empire.