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Pound Sterling weakens as stubborn US inflation dampens market sentiment

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  • The Pound Sterling tumbles as hot US inflation data dampens market sentiment.
  • UK Employment data for the three months ending January indicates weak labor demand and slower wage growth.
  • Cooling UK labor market conditions lift up BoE rate cut hopes.

The Pound Sterling (GBP) witnesses an intense sell-off in Tuesday’s early American session as the United States Bureau of Labor Statistics (BLS) has reported a hot Consumer Price Index (CPI) report for February, and the United Kingdom Office for National Statistics (ONS) has reported soft Employment data.

US monthly headline inflation grew by 0.4%, as expected, against a 0.3% increase in January. In the same period, core inflation, which strips off volatile food and energy prices, rose steadily by 0.4%. Investors anticipated the core CPI to grow at a slower pace of 0.3%. As for annual figures, the headline CPI accelerated to 3.2% from expectations and the former release of 3.1% and the core inflation decelerated slightly to 3.8% from 3.9% in January. Investors forecasted that the underlying inflation data will soften sharply to 3.7%.

Figures from the UK ONS show that higher interest rates from the Bank of England (BoE) and the deepening cost-of-living crisis are starting to dampen labor market conditions. The UK’s Unemployment Rate increased to 3.9%, employers fired 21K workers, and Average Earnings grew slower in the three months ending January. The labor market data clearly demonstrates uncertainty over the economic outlook, which could force BoE policymakers to start reducing interest rates earlier than previously expected.

Daily digest market movers: Pound Sterling weakens while US Dollar recovers

  • The Pound Sterling falls sharply as the United Kingdom ONS reported softer-than-expected Employment data for the three months ending in January.
  • The Unemployment Rate climbed to 3.9%, higher than expectations and the prior reading of 3.8%. UK employers laid off 21K workers against hiring of 72K job-seekers in three months ending in December. In February, the Claimant Count Change grew moderately by 16.8K from expectations of 20.3K. In January, individuals claiming jobless benefits were 3.1K, downwardly revised from 14.1K.
  • Average Earnings Excluding Bonuses grew by 6.1%, against expectations and the previous reading of 6.2%. Earnings including bonuses rose at a slower pace of 5.6%, against the consensus of 5.7% and the prior reading of 5.8%.
  • The pace at which Average Earnings (both with and without bonuses) for three months ending January declines is higher than expected by market participants. Slower wage growth is expected to allow Bank of England policymakers to consider rate cuts earlier than anticipated.
  • Conversely, on Monday, BoE policymaker Catherine Mann warned that there is a long way to go to bring down inflation sustainably to the desired target of 2%. Mann was one of the two policymakers who voted for a rate hike in the February monetary policy meeting.
  • This week, the Pound Sterling will remain in action as investors will shift focus to the UK monthly Gross Domestic Product (GDP) and the factory data for January, which will be published on Wednesday.

Technical Analysis: Pound Sterling drops below 1.2800

The Pound Sterling edges down below the round-level support of 1.2800 against the US Dollar after downbeat UK labor market data. The near-term appeal of the GBP/USD is still upbeat as the 20-day Exponential Moving Average (EMA) at 1.2720 is sloping towards the north. The pair has corrected from a seven-month high of 1.2894 to near the horizontal support plotted from the August 10 high at 1.2819.

The 14-period Relative Strength Index (RSI) is inches lower from its recent peak of 71.33, but the broader momentum remains bullish.

 

Inflation FAQs

Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.

The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.

Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.

Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it. Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.

 

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