HomeContributorsFundamental AnalysisUnexpected Fall in Inflation Punishes Sterling

Unexpected Fall in Inflation Punishes Sterling

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. Price action suggests that those who were heavily reliant on the possibility that higher rates would support Sterling further were left empty-handed, as deceleration in inflation eroded expectations of a UK rate increase in 2017. Although the Bank of England has adopted a hawkish tone in recent weeks, today’s fall in inflation is likely to ease pressure on the Bank of England taking action, consequently keeping hawks at bay.

There was a suspicion that bulls were relying on a weak foundation to propel the GBPUSD above 1.3000 last week, with the current selloff almost validating this observation. Investors should keep in mind that the fundamentals behind Sterling’s woes remain intact, with sellers potentially exploiting rate hike speculations and Dollar weakness to install fresh rounds of selling. From a technical standpoint, a decisive breakdown and daily close below 1.3000 should encourage a further decline towards 1.2850.

Will the upcoming OPEC meeting support oil?

It has certainly been an eventful second trading quarter for the oil markets, with the commodity still under intense pressure as the oversupply woes remained a dominant theme. As the third quarter of the year gets under way, investors will be paying very close attention to see whether OPEC moves forward with deeper cuts in an effort to stabilize the markets. The recent string of events involving OPEC and oil price action in general raise questions over whether the cartel has lost its grip on the global oil markets. For instance, the supply cut exemptions for some OPEC members have come back to bite the cartel, with reports circulating over the possibility that OPEC will request Nigeria and Libya to cut production. I believe the threat of increased production from Nigeria and Libya which would obstruct efforts made by the rest of the group to rebalance the markets may prompt OPEC to request for production caps from both nations at the upcoming OPEC meeting on 24 July.

Commodity Spotlight – Gold

Gold bulls received support in the form of Dollar weakness during Tuesday’s trading session, while concerns over Donald Trump failing to deliver on his controversial healthcare reforms complimented the upside as investors sought safe-haven safety. Although further upside could be on the cards in the short term amidst the cautious atmosphere, the rising prospects of tighter global monetary policy may dampen the metal’s allure this quarter. From a technical standpoint, bulls need a breakout and daily close above $1240 for a further incline higher towards $1260. In an alternative scenario, repeated weakness below the $1240 resistance level may encourage sellers to drag Gold back towards $1225.

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