Key EU and US inflation readings to be released today

GBP

Yesterday was a quiet day in the market with no high tier data to drive the pound. Sterling saw gradual decline against the euro for the fifth consecutive day as investors now turn their focus towards today’s key inflation reading from the EU and US.

The pound dropped by -0.24% to a reading around 1.1822 and has been in narrow range since we had the Bank of England’s interest rate decision last week. The BoE raised interest rates by 50 basis points to take rates to 1.75%, its biggest hike in twenty-five years. The negative forecasts for GDP growth and the outlook of a long and lasting recession in the UK have since weighed on the pound with inflation now forecast to hit above 13%.

The BoE keeps reiterating that future interest rate rises will be required but this is not enough to see the pound gain significantly against its peers. Indeed if energy prices keep rising and the cost of living crisis continues, this will have a negative impact on consumer spending and will likely lead to the UK falling into recession. UK energy bills have now been forecast to be on average £4,266 a year for a regular household from January 2023 without government intervention.

It is hard to see where the pound will see support in short to medium term with all economic indicators flashing red.

USD

Today US CPI data will be the main focus for the market as it looks for clues on the Federal Reserve’s future path. The reading today could reveal whether inflation in the US has finally started to cool and could also give us hints on whether the Fed will stick to its aggressive rate hiking cycle.

The yearly CPI rate is expected to have declined to 8.9% in July from 9.1% previously, while the monthly rate is forecast at 0.3% from 1.3% previously which would represent a big shift.

Money markets are currently pricing in even odds on whether the Fed will raise rates by 50 or 75 basis points in September. A weaker than expected inflation reading could lead to the Fed increasing rates by only 50 basis points, which in turn could lead to weaker USD benefitting the pound and euro. If however the reading overshoots the estimates, we can expect the possibility of the Fed raising rates by 75 basis points in September.

Key announcements

10:30 – GBP – Bank of England MPC Member Pill speaks
13:30 – USD – US CPI m/m – forecast 0.2% from 1.3% previous
13:30 – USD – US core CPI m/m – forecast 0.5% from 0.7% previous