Sterling has continued to move sideways since the end of August as the BoE meeting is now in focus on September 23rd. This week the UK currency lost some ground to the US Dollar while gaining on the Euro and Yen. Cable has settled above yesterday’s 8-day low at 1.3764, which was pegged on the back of dollar gains following strong US retail sales data. The pair has since steadied in the upper 1.3700s and is near net unchanged on the week.
Recent data have showed that the UK economy remains on an expansionary path. August CPI came in hotter than expected at 3.2% y/y, while core inflation also overshot expectations. The jump in headline rates may be partly due to special factors, and inflation should still come down again next year, but the numbers come on the back of a hot labour market report and against the background of surveys indicating that companies are being forced to lift wage offers to fill vacancies. The ILO unemployment rate dropped back to 4.6% in the three months to July – as expected. Earnings growth eased somewhat, but remained very strong, although officials have highlighted that this number is inflated by special factors.
At the same time, UK monthly GDP came in weaker than expected at 0.1%, versus Bloomberg consensus for a rise of 0.5% m/m and down from 1.0% m/m in June, while Industrial Production came in stronger than anticipated as Manufacturing production stagnated, construction output dropped -1.6% and the index of services also stagnated.
Today, the UK retail sales unexpectedly corrected -0.9% m/m in August, while the July reading was revised down to -2.8% m/m from -2.5% m/m reported initially. A pretty dismal result that left sales unchanged compared to August last year. The numbers will go some way to counterbalancing the stronger than expected labour market and inflation reports although they may also owe something to the delivery problems reported by many supermarkets as a result of a shortage of lorry drivers.
The strong numbers will add to the arguments of the hawkish camp at the BoE, as officials ponder strategies to exit from QE, especially as surveys also highlight an increasingly tight labour market that is leaving companies struggling to fill vacancies and forcing employers to upgrade wage offers. The jump in consumer inflation from 2.0% to 3.2% was the most significant jump in annual figures in 24 years and it also marked the highest UK inflation in 9 years. However, the UK government is also phasing out pandemic support measures and raising taxes, so the BoE is getting some support from tighter fiscal policies, which will take some of the pressure off monetary policy.
The expectation that the BoE could start a tighter monetary policy cycle sooner than the Fed is driving bullish bets on the strengthening of the Pound. The projection by the BoE is for inflation to reach 4% by the end of 2021.
In the currency market the EURGBP is stuck within the 0.8500-0.8550 area below the 20- , 50- and 200-day SMAs but above the midline of the 4-month downchannel.
The consecutive declines since last Wednesday from the 0.8613 high along with large low wicks are painting a bearish picture with the technical indicators suggesting a neutral to bearish bias. The MACD remains steady at zero level, the price action holds below the Ichimoku Kinko cloud for a 20th day, and Parabolic SAR are negatively configured, however RSI is standing slightly below the 50 barrier implying a possible consolidation in the short term.
The 0.8500 support remains under the spotlight while should selling forces strengthen, the the 6-month low of 0.8449 could next add some footing, while a break lower would endorse the broader bearish outlook.
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Andria Pichidi
Market Analyst
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