Pound Sterling struggles after US CPI data cements small Fed rate cut bets
- The Pound Sterling edges slightly up against the US Dollar, but a decline in bets that the Fed will opt for a large rate cut keeps the downside bias afloat.
- Investors see the BoE leaving interest rates unchanged at 5% at its September meeting.
- Market participants await the US PPI report for August.
The Pound Sterling (GBP) holds the late Wednesday’s recovery move from the psychological support of 1.3000 to near 1.3050 against the US Dollar (USD) in Thursday’s London session. However, the outlook of the GBP/USD pair is tilted to the downside as the US Dollar clings to gains near a fresh weekly high, with investors gaining confidence that the Federal Reserve (Fed) will start the policy-easing process with a 25-basis-points interest-rate cut.
The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, holds gains near 101.70. Investors have been speculating for weeks about the size of the upcoming Fed rate cut. Expectations for a small 25-basis-points interest-rate cut have strengthened after the Consumer Price Index (CPI) data for August, released on Wednesday, showed signs of some stickiness in inflationary pressures.
Annual headline inflation came in lower than anticipated. However, the core inflation data – which excludes volatile food and energy prices – remained sticky. Core inflation rose by 3.2% as expected, but the monthly figure grew by 0.3%, faster than the 0.2% anticipated.
Sticky US core inflation data significantly weighed on market expectations for sizable Fed rate cuts. According to the CME FedWatch tool, the probability of the Fed reducing interest rates by 50 basis points (bps) to 4.75%-5.00% in September has diminished to 13% from 40% a week ago.
In Thursday’s session, investors await the United States (US) Producer Price Index (PPI) data for August and the Initial Jobless Claims for the week ending September 6. Both reports will be published at 12:30 GMT.
The headline producer inflation data is expected to have slowed further due to falling energy prices, while core figures are projected to have accelerated.
Daily digest market movers: Pound Sterling wobbles against US Dollar
- The Pound Sterling ticks up against its major peers, except Asia-Pacific currencies, in Thursday’s European trading hours. The British currency rises as market participants seem confident that the Bank of England’s (BoE) policy-easing cycle will be less aggressive than that of other central banks.
- According to a Reuters poll, the BoE is expected to leave interest rates unchanged at 5% next week but is expected to reduce them again in November despite inflation remaining above the bank’s target of 2%. The comments from BoE Governor Andrew Bailey at the Jackson Hole (JH) Symposium also indicated that the central bank will cut interest rates gradually to keep a lid over inflationary pressures.
- An increase in market expectations for the BoE, keeping interest rates steady this month, appears to be the outcome of robust job growth and a decline in the Unemployment Rate. In the three months ending July, the jobless rate fell to 4.1%, while UK employers hired 265K new workers, a significantly higher number than the former release of 24K.
- Going forward, the next big triggers for the Pound Sterling will be the United Kingdom (UK) Consumer Price Index (CPI) data for August and the BoE’s interest rate decision, which are scheduled for next week.
Technical Analysis: Pound Sterling rises slightly to near 1.3050
The Pound Sterling edges higher against the US Dollar to near 1.3050, recovering from 1.3000. However, the near-term outlook of the Cable has become gloomy as the pair’s price action falls below the trendline plotted from the December 28, 2023, high of 1.2828 – from where it delivered a sharp upside move after a breakout on August 21. Also, a downside move below the 20-day Exponential Moving Average (EMA) near 1.3070 has weakened the Pound Sterling’s appeal.
The 14-day Relative Strength Index (RSI) declines into the 40.00-60.00 range, suggesting that the bullish momentum has concluded for now. However, the long-term bullish trend remains intact.
Looking up, the Cable will face resistance near the round-level at 1.3200 and the psychological level of 1.3500. On the downside, the psychological level of 1.3000 emerges as crucial support for the Pound Sterling bulls.
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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