The British pound has reversed directions and is in positive territory on Wednesday. GBP/USD is currently trading at 1.3823, up 0.15% on the day.
The reopening of the UK economy in July has fuelled a spike in inflation, and August CPI surged 3.2% (YoY), up sharply from 2.0% in July. The BoE has taken a page from the Federal Reserve’s playbook, insisting that higher inflation is temporary. I don’t expect the Bank to change its tune, despite the August numbers. Still, the markets will be a bit more sceptical if inflation does not cool off in the coming months.
There was positive news on the UK employment front earlier in the day. The number of payroll employees moved up for a ninth straight month, unemployment rolls continue to fall sharply, and the unemployment rate fell to 4.6%, down from 4.9%. This is certainly positive news, but not to such an extent that Bank of England policymakers will feel much pressure to raise interest rates. If, however, economic activity continues to improve and the Delta variant of Covid is brought under control, the BoE may have to reconsider its wait-and-see policy.
Market attention will shift to US Retail Sales, the primary gauge of consumer spending. If the data is strong, it could reignite fears of a taper by the Federal Reserve, which would be bullish for the US dollar.
The August CPI numbers pointed to a slight easing in inflation and may signal that inflation is finally under control. If inflation continues to ease, the Fed can afford to delay its tapering plans and this could put downward pressure on the US dollar.
GBP/USD Technical Analysis
- There is resistance at 1.3904. Above, there is resistance at 1.3978
- On the downside, we have support at 1.3742 and 1.3654
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