GBP/USD on Edge Before US Inflation Data and UK-China Sanctions

GBP/USD remains cautious around 1.2715-20 ahead of Thursday’s London session, as investors tread carefully before the release of US inflation figures for July. Additionally, the Pound faces resistance due to reports of the UK considering restrictions on British investment in Chinese tech firms. Meanwhile, concerns about a potential British recession and looming higher interest rates in London are also testing the Cable pair’s stability.

A recent report by the Financial Times (FT) suggests that UK Prime Minister Rishi Sunak is contemplating measures to limit outbound investment in the Chinese tech sector, including areas like artificial intelligence, chips, and quantum computing. This news gains traction as Sunak seeks support within the political sphere following disappointing by-election results.

Furthermore, the UK’s prominent think tank, the National Institute of Economic and Social Research (NIESR), projects that British economic output won’t recover to pre-pandemic levels until Q3 2024. The NIESR also suggests a 60% chance of the government facing a recession, while anticipating that UK inflation will remain above the Bank of England’s 2.0% target for the next four years. This could drive the Bank of England towards more hawkish actions to defend the British Pound.

Market sentiment remains uncertain as traders eagerly await the US Consumer Price Index (CPI) and preliminary Q2 Gross Domestic Product (GDP) figures for the UK. These figures add to the prevailing tension between the US and China.

Earlier, US President Joe Biden signed a bill enabling the US Treasury Department to restrict certain US investments in Chinese entities. In response, China’s Commerce Ministry expressed concerns and asserted its right to take countermeasures. However, the measures announced were somewhat less stringent than initially anticipated, allowing cautious optimism to persist in the markets.

Despite this, concerns stemming from China, Europe, and the UK, coupled with global rating agencies’ scrutiny of banks, continue to weigh on market sentiment. This is further fueled by fears of deflation in China and uncertainty regarding the future policies of major central banks. Nevertheless, ahead of crucial US data releases, recent market consolidation has boosted US stock futures and yields, putting downward pressure on the US Dollar.

Nonetheless, the US Consumer Price Index (CPI) data for July, expected to show a year-on-year increase of 3.3% compared to the previous 3.0%, needs to outperform expectations to dispel concerns about the Federal Reserve nearing its peak rate. This comes after the disappointing Nonfarm Payrolls (NFP) report for the same month.