By Kian Songra
Tuesday saw Sterling climb against the Dollar, Euro and other major currencies. The Office for National Statistics said that employment was rising, and the unemployment rate fell back to 4.2% in May, from 4.4%, reversing its second quarter increase. This figure was predicted to come out at an expected 4.5%, so a lower reading bolstered the pound in the early hours of Tuesday’s trading session. Average earnings came out to support the unemployment figure, beating the consensus of 4.6% for a year-on-year increase of 5.4% year on year increase. The Bank of England closely monitors average earnings growth because it has been flagged as a leading indicator for inflation and the risk of it persisting at an above-target level over the coming years.
GBP/USD extended its recovery and traded at a fresh weekly high on Tuesday. The upbeat employment data from the UK supports Pound Sterling, while the soft US producer inflation reading for July boosts the pair. If this trend continues, GBP/USD might further extend its gains, potentially testing higher resistance levels. However, buyers should remain cautious of any unexpected economic releases or shifts in central bank policies that could alter this outlook.
Eyes turn to the rest of the week
All eyes this week were focused on today’s 7 am inflation reading. The reading showed inflation increasing for the first time this year, coming out at 2.2%, slightly below the expected 2.3% that economists predicted. This has caused an initial drop of 0.25% for sterling, following the release, against both the EUR and USD. While the inflation rate remains above the Bank of England’s target, the softer-than-expected figure might reduce market expectations for any interest rate cuts. This could dampen the recent upward momentum of the Pound, as investors might reassess the likelihood of further monetary tightening, leading to a slight weakening of Sterling against other major currencies. It is predicted that traders are possibly pricing in two further interest rate cuts in 2024, and if this is the case we could see the rates slide under increased pressure.
Although this reading has dampened the Pound and pegged back some of the recent gains, let’s take nothing away from the current trading levels. If we look back historically over the last year these trading levels are still above the average on both the EUR and USD. With this in mind, it could be worth considering taking advantage of the rates before the possibility of the Bank of England’s next interest rate cut.
New Zealand posted their interest rate decision overnight, with the outcome expected to remain unchanged at 5.5%, a surprise cut to 5.25% was announced. This has seen the Pound gain on the NZD, as the likelihood that investors will look to higher interest rate economies with greater returns.
Strong UK GDP and Retail Sales data would likely boost the Pound, as it would indicate a healthy economy and could prompt the Bank of England to maintain or raise interest rates. On the other hand, if the UK data disappoints while US data like today’s inflation and Thursday’s retail sales come in strong, the GBP could weaken, particularly against the USD. These releases will be closely watched by market participants, and their outcomes will likely influence the direction of the GBP in the short term.
With the inflation reading causing a further drop in the Pound, we could see the pound lose some of its buoyancy over other major currencies. Therefore, it is recommended to stay in close contact with your dedicated consultant at A Place in the Sun Currency to look at mitigating the risk and removing the unknown variables ahead of your upcoming purchases.
Wednesday
10 am – EUR GDP data
1:30 pm – USD Inflation Data
Thursday
1 am – AUD Employment Data
7 am – GBP GDP data
1:30 pm – US Retail Sales
Friday
7 am – GBP Retail Sales
3 pm – USD Michigan Consumer Sentiment Index