The British pound has gained some ground against the US dollar on Friday, trading above the 1.2760 level, as investors reacted to the latest UK inflation data and the prospects of further interest rate hikes by the Bank of England (BoE).
UK inflation beats expectations in July
The UK’s Office for National Statistics (ONS) reported on Wednesday that the consumer price index (CPI) rose by 6.8% year-on-year in July, down from 6.9% in June, but higher than the market consensus of 6.7%. The core CPI, which excludes volatile food and energy prices, also increased by 6.9%, above the forecast of 6.8%.
The ONS attributed the rise in inflation to higher prices for transport, clothing, and household goods, as well as the impact of the easing of COVID-19 restrictions on the hospitality sector. The ONS also noted that the inflation rate was influenced by the comparison with lower prices a year ago, when the pandemic hit the economy hard.
The inflation data reinforced the expectations that the BoE will raise its benchmark interest rate from the record low of 0.1% in the coming months, as it tries to curb the rising price pressures and support the economic recovery. The BoE has previously signaled that it could hike rates as soon as November, depending on the evolution of the pandemic and the labor market.
GBP/USD benefits from hawkish BoE sentiment
The GBP/USD pair has been supported by the hawkish tone of the BoE, which contrasts with the more cautious stance of the US Federal Reserve, which has indicated that it will keep its ultra-loose monetary policy until it sees more progress on its inflation and employment goals.
The US dollar has also been weighed down by the resurgence of COVID-19 cases in some parts of the country, as well as by the uncertainty over the fiscal stimulus and infrastructure spending plans of the Biden administration.
The GBP/USD pair has risen by about 1.5% since the start of August, recovering from a five-month low of 1.3572 reached on July 20. The pair has also broken above its 50-day and 100-day moving averages, signaling a bullish momentum.
However, the pair faces some resistance near the 1.2800 level, which coincides with a descending trendline from the February high of 1.4243. A break above this level could open the door for further gains towards the 1.3000 psychological mark.
On the downside, a drop below the 1.2760 support level could trigger some profit-taking and lead to a correction towards the 1.2700 area, followed by the 1.2650 level, which acted as a strong support in late July and early August.
Outlook for GBP/USD
The outlook for GBP/USD will depend largely on the upcoming economic data from both sides of the Atlantic, as well as on the developments regarding the COVID-19 situation and the policy actions of both central banks.
Some of the key events to watch next week include:
- The UK retail sales data for July, which will be released on Friday, August 20. The market expects a rebound of 0.4% month-on-month, after a drop of 1.3% in June.
- The US durable goods orders data for July, which will be published on Wednesday, August 25. The market anticipates an increase of 0.7% month-on-month, following a rise of 0.8% in June.
- The US personal income and spending data for July, which will be announced on Friday, August 27. The market forecasts a decline of 0.2% month-on-month in personal income, after a fall of 2% in June, and a growth of 0.4% month-on-month in personal spending, after an expansion of 1% in June.
- The US core personal consumption expenditures (PCE) price index for July, which will also be released on Friday, August 27. The market expects a rise of 0.3% month-on-month and 3.6% year-on-year, matching the figures for June.
These data will provide more clues about the strength and resilience of both economies amid the pandemic challenges, as well as about their inflationary pressures and their implications for monetary policy decisions.
