Pound Sterling remains firm above 1.2700 with eyes on UK inflation
- The Pound Sterling trades strongly above 1.2700 against the US Dollar ahead of UK inflation data.
- UK inflation is forecasted to have declined sharply in April.
- Fed officials continue to support higher interest rates for a longer period.
The Pound Sterling (GBP) exhibits a firm footing, trading slightly above 1.2700 in Tuesday’s European session. The next move in the GBP/USD pair will likely be guided by the United Kingdom Consumer Price Index (CPI) data for April and the Federal Open Market Committee (FOMC) minutes for the May meeting, which will be published on Wednesday.
The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, remains steady near 104.60 as investors look for fresh cues about when the Federal Reserve (Fed) will start reducing interest rates. Investors await the FOMC minutes to get a deep understanding of policymakers’ views on the interest-rate outlook.
The impact of the FOMC minutes on markets could be light as the inflation outlook in the US has changed significantly since the last Fed meeting. Inflation declined as expected in April, signalling that the progress in the disinflation process has restarted after failing to do so during the January-March period. As the last Fed meeting was held before the release of the latest inflation print, the communication from Fed officials over interest rates is expected to be significantly hawkish.
Despite April’s decline in US inflation, Fed officials seem to still lack confidence that price pressures will sustainably return to the desired rate of 2%. On Monday, Fed Vice Chair for Supervision Michael Barr said that "Q1 inflation was disappointing, did not provide the confidence needed to ease monetary policy". Barr vowed for allowing more time for a tight policy stance to do its job.
Daily digest market movers: Pound Sterling moves higher despite steady US Dollar
- The Pound Sterling edges higher but trades inside Monday’s trading range and holds the crucial support of 1.2700 against the US Dollar. The Pound Sterling performs strongly against all major currencies ahead of the UK CPI data for April.
- Economists expect that the UK Office for National Statistics (ONS) will report a sharp decline in headline inflation to 2.1% from the prior reading of 3.2%. The core CPI, which strips off the more volatile items, is estimated to have decelerated to 3.6% from 4.2% in March. The monthly headline inflation is expected to have grown at a slower pace of 0.2% after a sharp increase of 0.6% in March.
- The expected decline in UK inflation will increase investors’ confidence that price pressures are on course to return to the desired rate of 2%. This will boost expectations of early rate cuts by the Bank of England (BoE). Currently, investors are divided between the June or August meeting from when the BoE could start returning to policy normalization.
- The expectations for the BoE to begin lowering interest rates in summer have strengthened, driven by a dovish communication from BoE Deputy Governor Ben Broadbent on the interest rate outlook. On Monday, Broadbent said: "If things continue to evolve with its forecasts – forecasts that suggest policy will have to become less restrictive at some point – then it's possible Bank Rate could be cut sometime over the summer," Reuters reported.
Technical Analysis: Pound Sterling trades above 1.2700
The Pound Sterling extends its winning spell for the third trading session on Tuesday but prices hover inside Monday’s trading session, suggesting that investors await fresh triggers for further action. The GBP/USD pair advances to an almost two-month high near 1.2700. The Cable is expected to remain in the bullish trajectory as all short-to-long-term Exponential Moving Averages (EMAs) are sloping higher, suggesting a strong uptrend. The Cable has retraced 61.8% of losses from March’s high around 1.2900.
The 14-period Relative Strength Index (RSI) has shifted into the bullish range of 60.00-80.00, suggesting that the momentum has leaned toward the upside.
Pound Sterling FAQs
The Pound Sterling (GBP) is the oldest currency in the world (886 AD) and the official currency of the United Kingdom. It is the fourth most traded unit for foreign exchange (FX) in the world, accounting for 12% of all transactions, averaging $630 billion a day, according to 2022 data. Its key trading pairs are GBP/USD, aka ‘Cable’, which accounts for 11% of FX, GBP/JPY, or the ‘Dragon’ as it is known by traders (3%), and EUR/GBP (2%). The Pound Sterling is issued by the Bank of England (BoE).
The single most important factor influencing the value of the Pound Sterling is monetary policy decided by the Bank of England. The BoE bases its decisions on whether it has achieved its primary goal of “price stability” – a steady inflation rate of around 2%. Its primary tool for achieving this is the adjustment of interest rates. When inflation is too high, the BoE will try to rein it in by raising interest rates, making it more expensive for people and businesses to access credit. This is generally positive for GBP, as higher interest rates make the UK a more attractive place for global investors to park their money. When inflation falls too low it is a sign economic growth is slowing. In this scenario, the BoE will consider lowering interest rates to cheapen credit so businesses will borrow more to invest in growth-generating projects.
Data releases gauge the health of the economy and can impact the value of the Pound Sterling. Indicators such as GDP, Manufacturing and Services PMIs, and employment can all influence the direction of the GBP. A strong economy is good for Sterling. Not only does it attract more foreign investment but it may encourage the BoE to put up interest rates, which will directly strengthen GBP. Otherwise, if economic data is weak, the Pound Sterling is likely to fall.
Another significant data release for the Pound Sterling is the Trade Balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports over a given period. If a country produces highly sought-after exports, its currency will benefit purely from the extra demand created from foreign buyers seeking to purchase these goods. Therefore, a positive net Trade Balance strengthens a currency and vice versa for a negative balance.
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