Key Insights:
- Sterling slips as investors brace for key inflation reveal.
- BoE gears up for interest rate hikes amid persistent inflation.
- Labor shortages and high food prices drive UK inflation concerns.
Sterling softened on Monday, despite bullish rallies last week. With investors cautiously eyeing this Wednesday’s critical inflation data release, the GBP/USD pair hovered around 1.2800. Besides, the Bank of England (BoE) girds its loins for more interest rate hikes in the face of persistent inflationary pressures.
Tight labor markets and surging food prices have kept the UK’s inflation stubbornly high. Consequently, the BoE appears set to lift interest rates further, despite the inflation rate showing signs of descent. Moreover, according to Reuters, the BoE will likely increase the interest rate by a quarter point to a 15-year high of 4.75% on June 22.
Sterling Faces Choppy Waters as Inflation and Labor Shortages Collide
Investors in the financial markets eagerly anticipate the upcoming revelation of the Consumer Price Index (CPI) data in the UK. This impending release is expected to generate a surge of excitement. Although the forecast predicts a 0.4% decline in headline inflation for May, compared to April’s 1.2%, the annualized CPI is still projected to remain high at 8.5%.
Notably, when excluding crude and food prices from the overall inflation rate, the estimated rate stands at 6.8%. It is worth noting that food price inflation in the UK is currently at a near 45-year high of 19%, further intensifying concerns surrounding inflation.
Compounding the issue, Brexit and increased early retirements have led to labor shortages. Hence, UK firms are countering labor scarcity with higher wages, further driving demand for core goods and services.
Despite these challenges, Finance Minister Jeremy Hunt has dismissed providing direct financial support to households grappling with escalating mortgage costs. Consequently, fiscal aid might only exacerbate the price index, pushing the central banks to increase interest rates further.
The International Monetary Fund optimistically forecasts that the UK will dodge recession this year, upgrading its growth projection to 0.4%. Additionally, the US Dollar Index (DXY) is amidst mixed responses from investors about the Federal Reserve’s policy guidance. Investors expect a solitary interest rate hike from Fed Chair Jerome Powell this year.
The sterling may find support near 1.2800 after a 13-month high of 1.2848. Should the GBP/USD pair surpass 1.2848, sentiment will shift toward the pound.
However, sterling might weaken if it falls below June’s low of around 1.2370. Thus, with markets keenly anticipating the inflation data release, the coming days will reveal Sterling’s fate amidst these challenging economic currents.
