Sterling fell significantly against the dollar, euro and yen

The FX market is waiting for next week's meetings of the Fed and the ECB. We have a blackout period, which means that we will not receive any new guidance from decision makers in the coming days. Yesterday's retail sales reading slightly strengthened the dollar, but the reaction was moderate. EUR / USD exchange rate still above 1,12. This morning, things got interesting on the pairs related to the pound. GBP weakened after lower than expected inflation data.

UK inflation surprises positively

British inflation peaked in June slowest pace in more than a year, causing the pound to weaken against other currencies, albeit at 7,9 percent. (headline CPI) continued to be well above target Bank of England of 2 percent

Economists polled by Reuters had forecast the CPI would fall to 12% in the 8,2 months to June. from 8,7 percent in May, moving further away from the 41-year high of 11,1 percent. achieved in October 2022. The core reading also surprised with a value of 6,9 percent. while the consensus indicated no change and a value of 7,1 percent. y/y

Sterling has fallen significantly against the dollar, euro and yen as interest rate futures have shown that investors no longer expect UK interest rates to peak above 6%.

The British stock market index FTSE100 reacted positively to the data, which at the moment is growing by almost 1,1 percent. The prospect of a slightly less restrictive BoE stance supports risky assets.

Expectations too high

So far, inflation in the UK has fallen at a very slow pace. Bank of England in recent months was not so determined to fight the CPI indicators (although it recently surprised with an upward movement of 50bps) as it is still afraid that the hikes made so far will push the British economy into recession. The BoE only reacted to the development of inflation, instead of fighting it decisively.

Market expectations for further interest rate hikes were, in my opinion, too high. Therefore, after today's data there was a reduction, which automatically contributed to the weakening of GBP.

The "cable" shows a technical correction of recent strong gains. Quotations GBP / USD fall to around 1,2930, while at the end of last week the exchange rate showed levels close to 1,3145. The nearest technical support is the level of 1,2840, which means a potential drop of less than 1 figure more. At this level, the June highs and the high from the beginning of July fall.

Source: Łukasz Zembik, OANDA TMS Brokers