The GBP/USD exchange rate held steady as investors reacted to the latest UK inflation expectation and GDP numbers. It was trading at 1.3537, as focus now shifts to the upcoming Bank of England (BoE) and Federal Reserve interest rate decisions. It has risen by about 12% above the lowest level this year.
UK publishes GDP and inflation data
The GBP/USD exchange rate remained unchanged after the UK published relatively weak economic numbers. A report by the Office of National Statistics (ONS) showed that the economy stagnated in July after growing by 0.4% in the previous month.
Another report revealed that the country’s manufacturing production dropped by 1.3% after growing by 0.5% in the previous period. Further, the industrial production softened by 0.9%, down from an expansion of 0.7% in the previous month.
Meanwhile, UK household inflation expectations continued soaring in a major setback for the Bank of England.
A report by the BoE found that the headline Consumer Price Index (CPI) will rise to 3.6% in the next 12 months, up from the previous atr3.2%. These expectations are the highest they have been since 2019. In a note, Robert Wood, an analyst from Pantheon Macroeconomics, said:
“Inflation running nearly double the target and households expecting that to continue poses a trickier backdrop for the crucial pay settlements period later this year than we saw in 2024.”
Therefore, there are concerns that the UK is currently in a stagflation period, which is characterized by high inflation and slow economic growth. It is normally a central bank’s worst nightmare since interest rate hikes to lower interest rates would affect economic growth.
Therefore, economists expect that the Bank of England will leave interest rates unchanged next week.
Federal Reserve interest rate cuts ahead
The GBP/USD exchange rate also reacted to the latest consumer and producer inflation data.
A report by the Bureau of Labor Statistics (BLS) showed that the Producer Price Index (PPI) dropped from 3.1% to 2.6%, while the core PPI moved from 3.4% to 2.8%.
Meanwhile, another report by the BLS showed that the headline CPI rose from 2.7% to 2.9%, while the core CPI remained unchanged at 3.1%.
These numbers came a week after data showed that the economy created just 22,000 jobs, while the unemployment rate rose to 4.3%. Still, analysts expect the Fed will cut interest by 0.25% in its next meeting.
“On the face of it, this hints at a pick-up in the pace of lay-offs in an environment of already weak hiring and will re-affirm expectations of a 25bp Fed rate cut next week.”
GBP/USD technical analysis
The daily timeframe chart shows that the GBP/USD pair rose from a low of 1.2102 in January to 1.3535 today. It has moved above the 23.6% Fibonacci Retracement level at 1.3395.
The pair has moved above the 50-day and 25-day Exponential Moving Averages (EMA), a sign that bulls are in control. It has formed an inverse head-and-shoulders pattern.
Therefore, the pair will likely have a bullish breakout, potentially to the year-to-date high of 1.3795, up by about 1.92% from the current level.
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