- GBPUSD is advancing to recapture the psychological resistance of 1.2000 as UK inflation surges.
- A sharp recovery in the United States Retail Sales has escalated troubles for the Federal Reserve policymakers.
- The collaboration of fiscal policy measures and the continuation of policy tightening by the Bank of England could trim roaring inflation.
- GBPUSD is expected to remain on the sidelines till the announcement of the United Kingdom Autumn Budget.
GBP/USD currency pair has resurfaced firmly after dropping to near the critical support of 1.1850 in the late New York session. The Cable has extended its recovery after overstepping the round-level resistance of 1.1900 and is gathering momentum to recapture the psychological hurdle of 1.2000 ahead. A significant jump in the United Kingdom inflation rate has triggered chances of further policy tightening by the Bank of England (BOE) in the upcoming monetary policy announcements. The headline Consumer Price Index (CPI) has pushed to 11.1%, a historic surge led by the tight energy market. While the core CPI has remained flat at 6.5% but higher than projections of 6.4%. One thing is for sure, that price growth in the United Kingdom has not displayed signs of exhaustion yet not they have reached their ultimate peaks, which will keep the job of the Bank of England policymakers filled with troubles. The US Dollar Index (DXY) is displaying signs of volatility contraction despite a surge in United States Retail Sales data. Also, clarification over the Russia-Poland noise has turned the market mood quite after a heated one. Meanwhile, the 10-year US Treasury yields have tumbled further below 3.7% as chances of a slowdown in interest rate hike pace by the Federal Reserve (Fed) have soared.
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Higher US Retail Sales shift pressure on Federal Reserve policymakers
Better-than-projected recovery in the United States Retail Sales data is expected to force the Federal Reserve policymakers to put in blood and sweat to avoid further inflation shocks. While Fed chair Jerome Powell is going through sleepless nights to slow down inflationary pressures by continuously hiking interest rates and impacting employment levels, a sharp recovery in consumer spending has spoiled the effort. The economic data rose by 1.3% in October against the projections of 0.9% and flat performance in September. Despite higher payouts after adjusting for inflation impact, consumer demand has been ‘resilience’ due to higher dependency on credit card borrowing.
Analysts at Wells Fargo are of the view that robust consumer demand gives businesses no incentive to forgo price increases, thereby making the task of getting inflation in check more difficult for Federal Reserve policymakers.” Households have increasingly relied on credit to spend which has resulted in a jump in the overall debt by $351 billion in the third quarter, according to data released yesterday by the NY Federal Reserve. They further added that a drawdown in households’ savings and reliance on debt to address spending may eventually spell economic trouble. Higher reliance on borrowings to cater to spending needs kept the US Dollar displaying strength.
Absence of an ultimate peak in UK Inflation raises hopes of more interest rate hikes
Inflationary pressures in the United Kingdom have jumped above the critical figure of 11% in October. Thanks to the tight energy market and labor force, which have kept reins in the overall demand. Also, an unexpected bond-buying program by the Bank of England is highly responsible for sky-rocketing inflation. While testifying before the UK Treasury Select Committee on Wednesday, BOE Governor Andrew Bailey cleared that “Still likely we will increase interest rates further” as the labor market is extremely tight according to the latest data. He further added that supply chain shocks are fading now.
As the Federal Reserve is looking to adopt a less-aggressive approach toward the interest rates and the Bank of England is bound to keep policy tightening intact. This may lead to a decline in the Fed-BOE policy divergence, which could further support the Pound.
UK Autumn Budget- a key trigger for Cable
The First Autumn budget under the leadership of UK Prime Minister Rishi Sunak and Chancellor Jeremy Hunt will dismantle Liz Truss’s mini-budget and put forward a strategic plan to wipe out the fiscal hole. For Autumn Budget, investors will focus on the bifurcation of tax hikes and spending cuts to meet the GBP 60bln fiscal hole. Treasury sources told Sky News the financial "black hole" could be as large as £60bn - which may require up to £35bn of spending cuts and an extra £25bn raised through taxation.
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