Inflation data is a key domestic driver, but global market trends are expected to dominate

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The national highlight for the pound this week will be the release of inflation data on Wednesday, although Friday’s retail sales are also highly anticipated, but it will be global market trends that will ultimately dictate the direction of the pound. sterling over the next few days.

The data release comes days after the Bank of England raised interest rates by 25 basis points, but warned that bigger and more hikes are likely over the next few months if the data releases the data. require.

The pound initially fell on the initial announcement of the 25 basis point hike as markets believed more was warranted given soaring inflation, but rose when it became clear that the Bank will likely be more aggressive going forward as it ultimately prioritizes inflation targeting over managing GDP growth.

The main takeaway from Thursday’s BoE policy update is that data matters, so Wednesday’s inflation numbers will be of great importance.

Headline CPI inflation likely rose 0.2 points to 9.1% year-on-year in May, which would be the highest since records began in 1989.

Core inflation would have increased by 0.1 point to 6.3% over one year.

This would mean the UK now has a warmer core CPI than either the Eurozone or the US

A sharp rise in these figures could push UK bond yields higher as investors anticipate further hikes in discount rates, which would also boost the pound’s exchange rates.

GBPEUR weekly

Above: GBP/EUR at weekly intervals showing 2022 performance.

Thursday’s PMI figures will provide the first major insight into the performance of the UK economy in June.

Markets are looking for the Flash Composite component of the PMI which should come in at 51.8, unchanged in May.

The manufacturing PMI is expected to come in at 54.6 and the all-important services PMI at 53.0, down from 54.6 in May.

Friday’s retail sales will provide insight into how consumers are reacting to rising inflation and are expected to contract 0.9% m/m in May, down from 1.4% growth. previously recorded.

A strong set of retail figures would signal to the Bank of England that inflationary pressures continue to build, as strong demand will only encourage businesses to pass on cost pressures.

A beat would therefore be generally favorable for the pound.

Ahead of the data, the GBP-EUR exchange rate is estimated at 1.17 after falling just 0.10% last week, while the GBP-USD exchange rate is at 1.2284 after falling by only a third of a percent. (Set your exchange rate alert here).

Global market sentiment will also be a key determinant of the course of the pound, given that it is a pro-cyclical currency that tends to gather support during times of global economic recovery.

Last week, some major US indexes officially fell into a bear market, which means the backdrop for the pound remains challenging as more equity losses are more likely than not.

GBP/USD weekly

Above: GBP/USD at weekly intervals showing 2022 performance.

“We remain bearish on the pound given the deterioration in the UK economy and because we expect much less tightening than is still predicted by the UK futures curve. Revaluation risk is still a cloud hanging over the pound,” said Roberto Mialich, UniCredit Milan.

“Positioning data suggests that investors are already net short in GBP-USD at near-record highs, but that may only slow the pair’s slide below 1.20. We see GBP-USD at 1.15 and EUR-GBP above 0.95 in 4Q23,” he added.

EUR/GBP at 0.95 is GBP/EUR at 1.0526.

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