Sterling climbs as UK inflation eases

It has been a busy week for the British pound. GBP/USD has climbed 0.66% today and is trading at 1.1566. This follows the pound’s huge decline on Tuesday, as the US dollar pummelled the major currencies after a weaker-than-expected inflation report shocked the financial markets.

The US dollar, which has looked mediocre recently, received a welcome shot in the arm after the July inflation report. The dollar steamrolled most of the major after the inflation data, and GBP/USD declined by 1.62%. Investors were not pleased with the report, as equity markets slumped and the US dollar rose sharply. Headline inflation dropped from 8.5% to 8.3%, but missed the consensus of 8.1%. Core CPI rose to 6.3%, up from 5.9% and above the forecast of 6.1%.

The markets had priced in a 75bp increase in September followed by 50bp in November and 25bp in December. However, with inflation higher than expected, the Fed may need to remain more aggressive than expected. Market pricing for the September meeting is fluctuating – currently, there is a 68% chance of a 75bp move and a 32% likelihood of a massive 100bp increase. Just a few days ago, a “modest” 50bp hike was a strong possibility, but it is apparently off the table after the inflation report.

UK inflation dips below 10%

UK inflation eased slightly in August to 9.9%, down from the 40-year high of 10.1% in July and a notch lower than the 10.0% estimate. The drop in headline reading was due to a decline in fuel prices. Core inflation rose to 6.3%, up from 6.2% prior. Inflation remains very high and the markets are expecting the BoE to come out swinging with a 75bp increase at the September 22nd meeting, just a day after the Federal Reserve meets. The BoE has projected that inflation will not peak before hitting 13%, which means that the new Truss government has its work cut out as it grapples with the severe cost of living crisis in the UK.

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GBP/USD Technical

• GBP/USD is testing resistance at 1.1548. Above, there is resistance at 1.1689
• There is support at 1.1417 and 1.1306

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