The British Pound is trading quietly today, after posting strong gains on Wednesday. In the North American session, GBP/USD is trading at 1.2220, up 0.02% on the day.
US inflation falls, dollar crashes
US inflation surprised on Wednesday, with both CPI and core CPI coming in below expectations. Headline CPI fell sharply to 8.5% from 9.1% in June and below the estimate of 8.7%. Core CPI remained stable at 5.9%, below the forecast of 6.1%. After months of rising inflation, markets felt palpable relief as headlines finally broke the uptrend. The US dollar took a beating, falling sharply against major currencies. GBP/USD rose an impressive 1.19% yesterday.
The Federal Reserve is breathing easier as inflation has finally eased, and it’s more likely 24 hours ago that the Fed eased rate hikes and offered a 0.50% increase in September rather than a hike by 0.75%. Nevertheless, it would be premature to declare that the dragon of inflation is slain and that the Fed will soon pivot on rate policy. The inflation rate of 8.5%, although lower than last month, is still close to a four-decade high. Inflation has come down mainly due to lower gasoline prices, but with the volatility seen in oil markets, gasoline could quickly change direction. Perhaps more importantly, inflation remains widespread; the core reading, which excludes food and energy costs, was flat at 5.9%.
Fed members left no doubt that despite the positive CPI report, further tightening was underway. Minneapolis Fed Chairman Kashkari said the Fed was “far, far away from declaring victory” on inflation, and Chicago Fed Chairman Evans said inflation remained ” unacceptably high. With the Fed looking to raise the benchmark rate to 4% or more by the end of 2023, there is still plenty of life left in the Fed’s rate-tightening cycle.
In the UK, the week ends with Friday’s GDP report for the second quarter. Markets are bracing for a soft release – GDP is expected to slow to 2.8% YoY from 8.7% in the first quarter. On a quarterly basis, GDP is projected at -0.2%, after gaining 0.8% in the first quarter. The pound received a huge boost on Wednesday thanks to US inflation. If GDP is weaker than expected, the pound will likely lose ground.
- GBP/USD continues to test resistance at 1.2241. Then there is resistance at 1.2361
- There is support at 1.2123 and 1.2061
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