Forex News

UK Inflation Remains High for Seventh Month Straight

Published by
Nonhlanhla P Dube
  • The Pound Sterling (GBP) fell against the US Dollar (USD) due to USD gaining support from the news of the emergency rescue of First Republic Bank by JP Morgan, which suggests a likely rate hike by the Federal Reserve.
  • Lower-than-expected JOLTS Job Openings data triggered a sell-off in the US Dollar but the overarching trend remains bullish.
  • UK inflation remains above 10% for the seventh consecutive month, indicating that the Bank of England (BoE) is likely to continue increasing interest rates, while the US Federal Reserve is nearing the end of its rate-hiking cycle. The prospect of higher UK interest rates favors the Pound Sterling over the Greenback.

The Pound Sterling (GBP) has experienced a decline against the US Dollar (USD) during the US session on Tuesday, finding its floor in the mid 1.24s. The USD has gained support from the news of the emergency rescue of First Republic Bank over the weekend, as JP Morgan has taken over the troubled lender. This takeover suggests that the Federal Reserve is much more likely to hike rates at its meeting concluding on Wednesday, which has bolstered the USD.

Despite the release of lower-than-expected JOLTS Job Openings data, which triggered a sell-off in the USD, the GBP/USD pair experienced a late lift during US hours. From a technical perspective, the pair continues to pull back from new year-to-date highs in the 1.2580s formed on April 28, and forms a two-bar reversal pattern that bodes follow-through lower in the very short-term, though the overarching trend remains bullish.

South Africans should take note of the impact of JP Morgan’s takeover of First Republic Bank on the USD, which suggests that the Federal Reserve is likely to hike rates. This development could have an impact on South Africa’s economy, as it may affect trade relations and influence the global economic climate.

The JOLTS jobs reports data for March showed a deeper-than-expected decline in job openings, which weighed on the outlook for the US economy and resurrected recession fears. However, the USD is still supported by higher-than-expected PCE inflation data, which is the Federal Reserve’s preferred inflation gauge. Last week’s data showed that prices remain sticky in the United States, which has further bolstered the USD.

Expectations have crystallized for a 25 bps rate hike by the Federal Reserve (Fed) at the upcoming FOMC meeting on Wednesday, May 3. According to Feds Funds Futures data, probabilities for a quarter percent hike have risen from 85% last week to 97% at the time of writing. This development is significant for South Africa, as it may impact trade relations with the US and affect the global economic climate.

Data for March continues to show UK inflation above 10% for the seventh consecutive month, suggesting that the Bank of England (BoE) is far from done with putting up interest rates. This contrasts with the US Federal Reserve (Fed), which is seen nearing the end of its rate-hiking cycle. The prospect of comparatively higher UK interest rates, therefore, favors the Pound Sterling over the Greenback, as it will attract more capital inflows.

GBP gains are underpinning support from an unexpected MoM rise in UK house prices by 0.5% in April versus the negative figure expected, according to data from the UK’s biggest mortgage lender, Nationwide. Data from the Commodity Futures Trading Commission (CFTC) shows that speculative investor flows have become increasingly supportive of the Pound over recent weeks, with non-commercial traders increasing their long bets above those of commercial traders who have been increasing short bets.

GBP/USD technical analysis suggests that the pair has been in a broad sideways trend since the beginning of the year within a longer-term uptrend that began at the September 2022 lows. Despite the volatile ups and downs of recent months, the pair did manage to make new higher highs in the upper 1.25s in late April, and the overall trend remains marginally bullish. Thus, Pound Sterling longs are marginally favored over shorts.

In conclusion, the GBP/USD pair has experienced a decline, finding its floor in the mid-1.24s against the USD. The USD has gained support from JP Morgan’s takeover of First Republic Bank, which suggests that the Federal Reserve is likely to hike rates.

Nonhlanhla P Dube

Nonhlanhla P Dube is a senior news reporter at Rateweb. Nonhlanhla is a student of International Relations at the University of South Africa. She reports primarily on personal finance and economics. You can contact her directly by email at nonhlanhla@rateweb.co.za

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Published by
Nonhlanhla P Dube

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