Pound Sterling has been grappling with significant challenges ahead of the upcoming UK inflation data. The data is anticipated to have a significant impact on the pound in the near term. The Office for National Statistics (ONS) will release the data on 19 July 2023, 07:00 (British time).
Inflation data expectations
June’s monthly inflation is projected to have grown at a slower pace of 0.4%, compared to May’s increase of 0.7%. The slowdown indicates a possible easing of price pressures, which could influence the country’s economic outlook. Annual headline inflation is expected to decelerate from 8.7% to 8.2%. Although still high, this moderation signals a potential step towards more sustainable inflation levels.
The core Consumer Price Index, which excludes the more volatile categories of food and energy, has been a major concern for the Bank of England (BoE) policymakers due to its stubbornness. The measure is predicted to remain steady at 7.1%, reaching fresh highs.
Factors driving inflation
Labour shortages and a 45-year-high food inflation have been fuelling inflation in the British economy. These factors have increased consumer prices and have made it very challenging for policymakers to control inflationary pressures.
However, there are signs of relief in the food sector, as producers have cut prices for the first time in over three years, as reported by a survey from Lloyds Bank. This could potentially alleviate some inflationary pressures.
Impact on Producer Price Index (PPI)
Investors will also closely monitor the Producer Price Index (PPI) figures, which are expected to remain soft. This suggests easing price pressures and may have implications for the BoE’s monetary policy decisions.
UK Finance Minister Jeremy Hunt’s discussions with industry regulators to curb higher prices add to the significance of PPI data in shaping the economic landscape.
BoE and interest rates
Despite the expected deceleration in factory prices, BoE Governor Andrew Bailey remains committed to hiking interest rates significantly. This stance is aimed at tackling persistently high inflation rates and ensuring price stability in the long term.
Market sentiment and US dollar influence
The overall market mood remains positive, with a strong preference for riskier assets. This sentiment could have implications for currency market movements, including Sterling.
The US Dollar Index (DXY) has experienced some downward pressure, ahead of the release of US Retail Sales data for June which will increase the volatility in the currency market.
Despite concerns about higher interest rates by the Federal Reserve impacting economic prospects, US Treasury Secretary Janet Yellen remains optimistic about the economy’s progress in tackling inflation and doesn’t expect a recession.
Sterling’s performance will depend on the upcoming UK inflation data. The expected deceleration in inflation and softening producer prices could influence the Bank of England’s future policy decisions. While the overall market sentiment is positive, global factors, especially the US dollar’s behaviour, might create additional volatility in the currency market.