Last week's inflation figures were disappointing, coupled with a notable rise in earnings. This adds more pressure on the Bank of England to persist in its efforts to raise interest rates.
The headline inflation rate fell to 6.8%, primarily due to decreased energy costs. However, it stubbornly remains above the targeted 2%. Simultaneously, wage growth surged to 7.8% during the three months leading up to June, marking the fastest growth rate on record. Unemployment also climbed to 4.2%, reaching its highest point since July 2021.
The Bank of England is widely anticipated to raise rates by 0.25% next month, with another increase projected for November. This trajectory would bring rates to 5.75% by the end of the year. Government bond yields, a benchmark, are trading at levels not seen since 2008.
There is a notable concern, however, that the delayed consequences of rate hikes over the past year have yet to impact households' costs for servicing their debts. Nevertheless, there might be a slight alleviation of cost-of-living pressures if wages continue to outpace inflation in the coming months.
On the other side of the Atlantic, the US economy remains strong, as evidenced by better-than-expected retail sales. However, it appears likely that the Federal Reserve will maintain its current stance for the rest of this year. It is expected to then lower rates early next year, as the focus shifts from battling inflation to fostering growth.
In Europe, the likelihood of another rate hike next month has surged past 50% according to market sentiment. In the trading arena, the holiday season has led to reduced liquidity and a lack of strong conviction. This is reflected in the volatility of GBP/USD, fluctuating between 1.2500 and 1.3000, and GBP/EUR remaining at the upper end of the established range of 1.1500 to 1.1750.
