GBP/USD Struggles To Substantiate Hawkish BoE Worries Near 1.2700; UK Inflation and FOMC Minutes in Focus

GBP/USD remains under pressure below 1.2700, trading near 1.2690 at press time, as it fails to cheer the UK's escalating inflation concerns and upbeat growth figures in the face of economic worries and broad US Dollar strength ahead of the most important data/events. Thus, the Cable combination justifies a rise in US Treasury bond yields.

According to the most recent survey from the UK's Chartered Institute of Personnel and Development (CIPD), human resources executives anticipated a median increase in basic pay rates of 5% – unchanged from the previous two quarters and the joint-highest readings since the survey's inception in 2012. In addition, the CIPD survey reveals that public sector pay expectations reached a record high of 4.0%, up from 3.3%. The same intensifies pressure on the Bank of England (BoE) to raise interest rates in response to rising inflation.

Previously, the UK economy unexpectedly grew by 0.2% in the second quarter. In June, the Gross Domestic Product (GDP) of the United Kingdom increased by 0.2% q/q, which, while modest, was better than forecasts of a level result and significant in the context of 0.4% annual growth. In June, industrial production in the United Kingdom increased 1.8% m/m, significantly outpacing expectations of a 0.2% rise. The manufacturing output increased by 2.4% month-to-month.

In contrast, the US Consumer Price Index (CPI) data for July failed to boost Fed forecasts for September, indicating that a policy shift is imminent. However, the CPI data and other measures of price pressure kept dollar investors optimistic. Friday's USD strength can be attributed to the US Producer Price Index (PPI) for July, the preliminary readings of the University of Michigan's (UoM) Consumer Sentiment Index (CSI) for August, and the UoM 5-Year Consumer Inflation Expectations for the same month. Moreover, the one-year inflation outlook for the United States decreased to 3.3% from 3.4%.

Notable is that Federal Reserve (Fed) Governor Michelle Bowman supported additional rate increases and defended Fed conservatives. However, San Francisco Fed Bank President Mary Daly, Philadelphia Fed Bank President Patrick Harker, and New York Fed President John Williams all signalled rate cuts in 2024, while emphasising data dependence and keeping policy doves on the lookout for additional evidence to confirm the bias.

Fears of a British recession received the most attention, joining economic and geopolitical concerns from China to support US Treasury bond yields, which exerts downward pressure on the GBP/USD exchange rate.

In light of the probable hawkish move by the Bank of England, the employment, inflation, and retail sales figures for the United Kingdom this week will be crucial for the direction of the pound sterling. The US Retail Sales and the minutes of the most recent Federal Open Market Committee (FOMC) monetary policy meeting will also be significant.