Pound Sterling remains capped below 1.2800 as more interest rate hikes could dampen UK economy

• Pound Sterling is under pressure as BoE Bailey is expected to deliver hawkish remarks.
• United Kingdom government is adding measures beyond monetary tools in the inflation-control toolkit.
• Wage cuts for public sector employees would put more burden on households amid higher inflationary pressures.

The Pound Sterling (GBP) is facing selling pressure as investors are worried that the continuation of policy tightening by the Bank of England (BoE) would further dampen the economic outlook of the United Kingdom. The GBP/USD pair is going through a rough phase as more interest rate hikes by the BoE are reasonable considering that UK’s inflation is showing no signs of softening.

The speech from BoE Governor Andrew Bailey will remain in focus as investors are keen to know the consequences of higher interest rates to the United Kingdom economy and cues about the interest rate guidance. In comparison with developed economies, inflationary pressures in the British economy are extremely persistent and investors are losing their confidence in BoE policymakers and government.

Daily digest market movers: Pound Sterling stays below 1.2800 ahead of Andrew Bailey’s speech

• Investors are awaiting the speech from Bank of England Governor Andrew Bailey for interest rate guidance.
• The latest survey of 52 economists by Reuters showed that the Bank of England will raise borrowing costs 50 bps higher than was thought only two weeks ago, in two quarter-point moves, as elevated inflation proves trickier to bring down than had been expected.
• United Kingdom government has started looking beyond monetary policy measures as May’s Consumer Price Index (CPI) turned out more persistent than anticipated.
• UK FM Jeremy Hunt has urged industry regulators not to elevate profit margins by taking benefit of resilient demand.
• In addition to freezing corporate profits, wage cuts in the public sector are also under consideration as lower cash for disposal would release some heat from resilient demand.
• The image of the Conservative Party is in danger as wage cuts for public sector employees would put the burden on households in offsetting higher price pressures.
• May’s inflation was higher than expected as the impact of lower gasoline prices was neutralized by higher prices for second-hand automobiles.
• Core CPI printed a fresh high at 7.1% and made UK PM Rishi Sunak uncomfortable as he promised to halve inflation by year-end.
• Stubborn inflation was followed by a fat rate hike of 50 basis points (bps) from the Bank of England to 5%.
• The Pound Sterling has been underperforming as stick inflationary pressures are threatening the economic outlook of the British economy.
• Market sentiment has turned negative as investors are awaiting the speech from Federal Reserve (Fed) chair Jerome Powell for the interest rate guidance.
• As per the CME Fedwatch tool, around 77% chances are in favor of a 25 bp interest rate hike in July to 5.25-5.50%.
• The Upbeat United States Durable Goods Orders data showed promising signs of recovery in the manufacturing sector.
• US Census Bureau reported that Durable Goods Orders expanded by 1.7% while the street was anticipating a contraction of 1%. May’s Durables data has outperformed April’s figure of 1.2%.
• The US Dollar Index has refreshed its day’s high at 102.70 amid the risk-aversion theme.

Technical Analysis: Pound Sterling continues to face barricades around 1.2750

Pound Sterling delivered a steep fall after forming a Double Top chart pattern on an hourly scale around 1.2848. The Double Top pattern would be activated if the Cable surrender the round-level support of 1.2700. This would mark an activation of a bearish reversal and the US Dollar bulls might get in the driving seat.

Only a recovery move above the recent high of 1.2848 would give an upper hand to the Pound Sterling bulls. Momentum oscillators are demonstrating a non-directional performance.