GBP/USD pushes higher as inflation drops to 6.8%

• UK inflation drops but core rate remains steady
• US dollar gets lift from strong retail sales

The British pound has posted considerable gains on Wednesday. In the North American session, GBP/USD is trading at 1.2754, up 0.39%.

UK inflation drops sharply but core CPI unchanged

The UK released the July inflation report today and the readings were a mixed bag. Headline CPI dropped to 6.8% y/y, a sharp drop from the 7.9% gain in June and matching the consensus estimate. The decline was certainly welcome news but the driver of the downswing was a sharp drop in fuel prices. Core CPI, which excludes energy and food, remained unchanged in July at 6.9% and above the estimate of 6.8%. The core rate rose 0.3% m/m in July, up slightly from the July reading of 0.2%, which was also the estimate.

There was some good news in the inflation report as headline CPI declined by 0.4% m/m in July, compared to +0.1% in June and very close to the consensus estimate of -0.5%. Still, the fact that core CPI remains elevated and sticky provides support for the hawks at the Bank of England who believe that rates must rise further in order to curb inflation.

The inflation report comes on the heels of a soft UK employment report on Tuesday. The data revealed that the tight labour market is finally cooling, which would ordinarily be positive news for the Bank of England. The one glaring exception to the soft numbers was wage growth, which jumped to a record 7.8%, up from 7.5% and above the consensus estimate of 7.3%. The increase in wage growth is indicative of a wage-price spiral which will hamper the BoE’s efforts to curb inflation.

The US released a robust retail sales report on Tuesday, giving a boost to the US dollar as speculation rises that the Fed may not be done with the current rate-tightening cycle. Headline retail sales rose 0.7% m/m in July, but core retail sales stole the show with a massive 1% gain up from an upwardly revised 0.4% in June. Consumer spending is picking up, which could complicate the Fed’s plan to ease up on rates and guide the economy to a soft landing.

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GBP/USD Technical

• GBP/USD is testing resistance at 1.2726. The next resistance line is 1.2787
•  1.2634 and 1.2573 are providing support

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