British Pound softens below 1.3500 as traders await UK CPI data, Fed rate decision
- GBP/USD weakens to around 1.3470 in Wednesday’s early Asian session.
- The Fed is set to raise interest rates later on Wednesday.
- Economists predict a rise in inflation to 3.1% in August as a result of higher motor fuel prices.
The GBP/USD pair loses ground to near 1.3470 during the early Asian trading hours on Wednesday. The US Dollar (USD) strengthens against the British Pound (GBP) on expectations of a US interest rate hike. Traders brace for the UK August Consumer Price Index (CPI) inflation report and the Federal Reserve (Fed) interest rate decision later on Wednesday.
Markets are increasingly convinced that the Fed will hike the benchmark interest rate by 25 basis points (bps) at its September policy meeting on Wednesday in response to the jump in energy prices that has pushed underlying inflation by more than expected in August.
"While markets are prepared for a hike, investors should remain on alert for any surprises, " said Juan Perez, senior director of trading at Monex USA in Washington.
"You have to be prepared for the unexpected ... this is a time of volatility," Perez said, adding that given Fed Chair Kevin Warsh's aversion to forward guidance, it was not unthinkable that the US central bank may choose to hold rates.
UK August CPI inflation is expected to have risen by 3.1% over a year earlier, up from 2.9% in July. The core CPI is projected to show an increase of 2.6% YoY in August, versus 2.6% prior. This inflation report will feed into the Bank of England’s (BoE) decision-making ahead of its interest rate decision on Thursday.
The BoE is expected to hold the interest rate steady at 3.75% in September, though a rate hike to 4% is predicted before the end of the year as inflation builds up.
UK inflation in focus but BoE seen staying on hold
Strategists at Scotiabank flag that the upcoming UK inflation print remains the key near-term catalyst for Sterling, describing the CPI release as “the weekly data highlight.” However, they caution that the outcome is “unlikely to force policymakers to unexpectedly hike on Thursday,” reinforcing the view that, barring a major surprise, the BoE is set to leave policy unchanged at this week’s meeting.
Technical Analysis: GBP/USD is well-supported above the 100-day SMA
In the daily chart, GBP/USD hovers just above the 100-day moving average (MA) and the lower Bollinger Band, which together offer a modest support shelf, but price remains below the Bollinger midline, keeping the broader tone capped. The Relative Strength Index (14) around 42 suggests fading bullish momentum and tilts the near-term bias slightly lower while the pair consolidates between these band levels.
On the topside, initial resistance emerges at the Bollinger middle band near 1.3550, with a stronger barrier at the upper band around 1.3660, where sellers could reappear if a rebound extends. On the downside, immediate support is seen just beneath the market at the 100-day MA around 1.3445, reinforced by the adjacent lower Bollinger Band near 1.3440; a clear break below this cluster would open the door to a deeper pullback within the broader range.
(The technical analysis of this story was written with the help of an AI tool. Know more.)
Fed FAQs
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.
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