Sterling continued to lose its value against the U.S. dollar on Tuesday, partially erasing last week’s gain. It was down 0.47 percent or 0.00621 points, to close at $1.31880, as UK’s inflation rose to as high as 3.0 percent, which was matching economists’ average expectation, the highest level in more than five years in September.
A high reading of CPI year-on-year showed on Tuesday has been cranking up the pressure on the Bank of England, adding to the likelihood that it will raise the interest rate next month.
The reason why sterling has been supported last month is the expectation that BoE will lift rates to curb rising prices, but governor Mark Carney was failing to provide any new indications in monetary policy and new deputy governor Sir Dave Ramsden showed his dovish voice in Parliament, which dragged down the pound on that afternoon.
Rising inflation is primarily driven by the pound’s value loss since the Brexit last year, squeezing household incomes, dragging people’s living condition where wages have failed to keep pace with the rising cost of living, and therefore, causing slower broader economic growth. However, this situation may be alleviated by rising likelihood of rate hike next month.
As widely expected, the gain of consumer prices in September was pushed by food and non-alcoholic beverages (3 percent), recreation and culture (2.5 percent) and transport (4.2 percent), in particular fuels and lubricants (6.1 percent).
New Bank of England Deputy Governor Dave Ramsden said on Tuesday that domestic price pressures remain below the kind of levels that would pose a threat to the central bank’s inflation target. This implies the inflation is imported.
The imported inflation comes from the depreciation of Pound, which causes rising prices of imports, then drives prices of imports increase, and consequently the general prices of all goods and services in UK has risen.
As depicted in the daily chart below, the broader outlook for GBP/USD remains constructive as it preserves the upward trend channel from earlier this year.
However, near-term outlook for the pair continues to decline after capped by the Fibonacci around 1.3316 (38.2% retracement), and it may find support at level of 1.31075 (61.8% retracement), while the Relative Strength Index (RSI) appears to be turning ahead of trendline resistance.
Chart 1: GBPUSD Daily
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