The Pound Sterling (GBP) rebounds strongly in Wednesday’s early New York session as the United Kingdom Office for National Statistics (ONS) reported that the Consumer Price Index (CPI) for March grew more than what economists had expected. Despite beating estimates, inflation has softened from February, suggesting that higher interest rates by the Bank of England (BoE) contribute to abate price pressures.
Meanwhile, producer price inflation has also slowed, indicating prices of goods and services at factory gates are easing. Business owners generally slash their prices when they expect demand to remain subdued.
After the release of the inflation data, BoE Monetary Policy Committee (MPC) member Megan Greene said, "We're closer to target than we were just a few months ago, so the inflation data has been encouraging," but warned that global supply shocks and volatile oil prices could dampen progress in inflation.
A less-than-expected decline in the inflation data keeps speculation that the BoE will start lowering interest rates from November unabated, although Tuesday’s employment data suggested that the UK’s job market is cooling. The labor market report showed that the Unemployment Rate rose sharply to 4.2% in the three months ending February from expectations of 4.0% and the prior release of 3.9%. The number of employed people fell by 156K in the three months to February, more than the 89K jobs lost in the quarter to January.
The Pound Sterling exhibits a firm footing after the release of the UK inflation report for March. The GBP/USD pair sees strong buying near the crucial support at 1.2400. The upside in the Cable is seen limited near the psychological resistance of 1.2500. This coincides with the breakdown region of the Head and Shoulder chart formation on the daily time frame.
The long-term outlook turns bearish as the Cable drops below the 200-day Exponential Moving Average (EMA), which trades around 1.2560.
The 14-period Relative Strength Index (RSI) shifts into the bearish range of 20.00-40.00, suggesting an active downside momentum.
Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.
The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.
Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.
Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it. Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.
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