The Pound Sterling (GBP) experienced a notable slide against its major currency peers due to the release of the UK’s latest Inflation data. The annual headline Consumer Price Index CPI rose to 2.2%, below economists' forecast of 2.3% but above the Bank of England's (BoE) 2.0% target. The softer-than-expected UK CPI report has boosted market expectations for interest rate cuts by the Bank of England (BoE).

Impact on the GBP

The authoritative reports showed that the UK CPI rose to 2.2% in July, compared to 2.0% in June. Additionally, the Core CPI, excluding volatile food and energy items, increased to 3.3% (annually) in July, compared to 3.5% in the prior period, which was worse than the economists' forecast of 3.4%. Meanwhile, the service price inflation lowered to 5.2% in July from June's 5.7%, which was softer than the forecast of 5.5% and the weakest since June 2022. On Thursday, in anticipation of the UK Gross Domestic Product (GDP) for the second quarter (Q2), the market sentiment will highly influence the GBP's price chart.

Key Reasons for the Impact

Inflation Dynamics: The Pound rate remains tightly controlled within a narrow band due to speculation surrounding the UK Gross Domestic Product (GDP) for the second quarter (Q2). The UK inflation rate, while rising, did not meet economists’ expectations, causing volatility in the Pound’s value. The CPI increase to 2.2% was below the forecast, impacting investor sentiment and currency.

Monetary Policy Expectations: Market speculation of an interest-rate cut by the Bank of England (BoE) in August reflects the need for a hawkish stand to control UK inflation. Marketers are adjusting their positions as upcoming UK Gross Domestic Product (GDP) for the second quarter (Q2) reports are projected to show a 1.0% year-on-year expansion. The expected rate cuts can drive foreign capital from the local market to safe-haven currencies, reducing the demand for the Pound.

Investor's sentiments: The global currency market is echoing two significant data releases: the Eurozone Gross Domestic Product (GDP) for the second quarter (Q2) and the US Consumer Price Index (CPI) for July. While a softer UK CPI inflation report hampers the Pound, both reports will significantly influence the EUR/GBP and GBP/USD rates.

Market Overview:

The currency market is reacting to the UK CPI inflation data while awaiting the Eurozone Gross Domestic Product (GDP) for the second quarter (Q2) and the Consumer Price Index (CPI) inflation data from the United States (US) for July. These indicators will significantly influence the currency's current and future performance.

Domestic Economic Reactions

The lower UK CPI reports temporarily benefit consumers by increasing purchasing power, but inflation remains above the Bank of England’s 2.0% target. Lower-than-expected inflation can boost consumer confidence and GBP's purchasing power. However, to curb rising inflation, the BoE’s monetary policy can continue to impact GBP prices and investor behaviour and their investments in local markets.

International Market Reactions

Internationally, the UK's inflation perspective can influence commodity prices, boosting UK exports. Global markets scrutinise the impacts of UK CPI reports while speculating about the monetary decisions by the BoE, These factors influence the GBP’s performance against other currencies.

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