Pound Sterling's best level since May was made in Washington

On Wednesday, the Pound Sterling (GBP) reached its highest level since May, closing just above 1.3600, marking its best close in three months. The United Kingdom's inflation report, which opened the session, had minimal impact on the currency's performance. Throughout the London morning, Sterling experienced a slight increase of barely twenty pips.

The price surge occurred after midday when a Treasury notice in New York removed support from the Dollar. In July, the annual Consumer Price Index (CPI) inflation rose to 2.9% from 2.6%, matching market expectations and marking the first increase since March. Meanwhile, core inflation held steady at 2.6% against a 2.5% forecast.

The only line that exceeded expectations was the services inflation, which slowed to 3.4% from the forecast of 3.6%. The decline was attributed to a 13.5% increase in the regulated household energy cap that took effect in July. Gas prices rose by 14.7% on the month, while transport inflation fell to 3.6% due to cheaper diesel, and food prices eased to 1.3%.

The changes were anticipated, as the July projection already predicted inflation peaking near 3.2% at the end of the year due to this energy pass-through. The July labour market report had a negative effect on Sterling. The Treasury announced a plan to double the size of its liquidity support buyback operations in longer-dated bonds, increasing each operation from $2 billion to at least $4 billion starting September 9.

This announcement caused long yields to fall significantly, with the thirty-year yield dropping close to ten basis points from above 5.33%. The Dollar was sold against every major counterpart during the American afternoon, contributing to the Pound Sterling's rise. The Swiss Franc and the New Zealand Dollar also gained against the Dollar, indicating a broad market unwind.

The mechanism behind this price movement is significant, as it determines the durability of the level. The announcement of more long-dated bond buybacks reduces yields by providing a bid instead of improving the inflation outlook. Currency markets treat these two routes to the same yield differently. Gold prices rose towards $4,500 an ounce on the same news, which is not the expected behavior of a market that believes American inflation risk has decreased.

On Thursday, GfK consumer confidence for August was released at 23:01 GMT, with a consensus of -18 against a prior of -17. On Friday, July retail sales data was expected at 06:00 GMT, with a forecast of -0.5% on the month and -0.5% excluding fuel. The annual line, which roughly halved, is the most important figure, as it converts one soft month into a direction.

The preliminary August S&P Global Purchasing Managers Index (PMI) series, released at 08:30 GMT, showed that every domestic release left on the week was forecast beneath its prior, leaving the Pound Sterling at its best level since May, ahead of a calendar consensus that expected a disappointment. The only factor holding this trade together is the Dollar, which is the key to watch.

The session high of 1.3650 is the first resistance barrier, followed by the early-May peak just above 1.3650, and 1.3700, which would indicate a trend break rather than a Dollar accident. Support is provided by the 1.3600 handle, the 50-day Exponential Moving Average (EMA) near 1.3450, and the 200-day average near 1.3400. The daily Stochastic Relative Strength Index (Stoch RSI) sits at 90, in overbought territory, suggesting consolidation before any further price movement.

Overall, the Pound Sterling is considered bullish while holding above 1.3550, with objectives to reach the early-May peak just above 1.3650 and eventually 1.3700. If the price falls back beneath 1.3550, the bullish bias would be invalidated.