GBP/USD sees a downside to near 1.2100 ahead of US/UK Inflation Expectations

• GBP/USD is expected to decline to near 1.2100 as the Fed is set to escalate the interest rate peak target.
• United States wage inflation has triggered the risk of higher consumer spending ahead.
• United Kingdom’s food supply crisis has escalated led by skyrocketing costs and labor shortages.

The GBP/USD pair has shifted its business below the crucial support of 1.2150 in the early Asian session. The Cable is declining towards the immediate cushion of 1.2100 as the risk aversion theme is gaining more traction. The major is expected to remain on tenterhooks as the US Dollar is looking to add more gains amid a significant improvement in safe-haven’s appeal.

The US Dollar Index (DXY) has climbed to near Friday’s high around 105.60 and is expected to deliver more gains as the Federal Reserve (Fed) is expected to continue severe policy tightening measures to safeguard the economy from wage inflation fears.

Meanwhile, S&P500 futures witnessed a sell-off consecutively on Tuesday as a higher interest rate peak by the Fed triggered recession fears. The US Treasury yields have failed to keep up the bullish momentum and have declined despite renewed fears of a rebound in inflation.

A tight labor market and robust demand in the US service sector are going to keep wages reported on a firmer note ahead. Higher wages to households will allow them more purchases of durable goods and robust consumer spending will keep inflation comfortably in a strong position. Fresh evidence of a rebound in inflationary pressures has forced market participants to presume a higher interest rate peak ahead.

Going forward, investors will look for five-year consumer inflation expectations for further guidance. Long-term inflation expectations are still anchored as the Fed has already accelerated its interest rates dramatically.

On the United Kingdom front, risks of a food supply crisis have escalated led by skyrocketing costs and labor shortages. Minette Batters, president of the National Farmers Union said “We need government and the wider supply chain to act now. Tomorrow could well be too late.” as reported by Financial Times.

This week, investors will focus on annual consumer inflation expectations, which will release on Friday. The forward inflation indicator is expected to remain solid as the retail demand is firmer in the UK economy. UK’s Like-For-Like Retail Sales reported by the British Retail Consortium (BRC) escalated to 4.1% from the prior release of 1.2% in November on an annual basis. Households’ robust demand indicates a higher price rise index ahead.