The fact that Sterling sharply depreciated across the board on Tuesday, after British inflation rates unexpectedly dropped to 2.6% in June, continues to highlight how the currency has become increasingly sensitive to monetary policy speculation.
Despite today’s sell-off, the price action on the British pound/U.S. dollar currency pair looks bullish thanks mainly to ongoing weakness in U.S. dollar. The cable took its sweet time but last week finally cleared a major hurdle when it closed above the 1.3000-1.3050 resistance area where it had struggled in the past.
After an eventful day in the markets yesterday, U.S. stocks are higher, but off their best levels; gold is also up while crude oil has given up its earlier gains. In FX, the U.S. dollar is mostly weaker but not as much as the euro, while the British pound is up slightly and the Canadian dollar is significantly higher.
Today's latest UK jobs and wages data was overall better than expected, which has alleviated some of the concerns about the falls in real wages. But the key question remains: will the Bank of England maintain its recent hawkish rhetoric? I think it will, and I, therefore, expect to see higher levels for the pound against some of her weaker rivals, including the U.S. dollar.