Pound Sterling trades cautiously ahead of US inflation data
- The Pound Sterling faces pressure near 1.3060 against the US Dollar, with US inflation under the spotlight.
- A majority of Fed officials voted for a larger-than-usual rate cut of 50 bps in September.
- In the UK, investors will pay close attention to the monthly GDP data for August on Friday.
The Pound Sterling (GBP) struggles above 1.3050 against the US Dollar (USD) in Thursday’s London session. The GBP/USD pair remains under pressure amid uncertainty ahead of the United States (US) Consumer Price Index (CPI) data for September, which will be published at 12:30 GMT.
The annual headline CPI inflation is expected to have decelerated to 2.3%, the lowest figure since February 2021, from 2.5% in August. In the same period, economists expect the core CPI – which excludes volatile food and energy prices – to have grown steadily by 3.2%. The month-on-month headline and core CPI are expected to have risen at a slower pace of 0.1% and 0.2%, respectively.
Investors will pay close attention to the US inflation data to get fresh cues about the Federal Reserve’s (Fed) likely interest rate action in the last quarter of the year. According to the CME FedWatch tool, traders have priced in a 25 basis points (bps) interest rate cut in each of the remaining two policy meetings this year.
Signs of price pressures remaining persistent would have a nominal impact on the Fed’s dovish bets as officials are highly concerned over growing risks to economic growth, with confidence over inflation returning to the bank’s target of 2%. The Federal Open Market Committee (FOMC) minutes for the September meeting, released on Wednesday, showed that a substantial majority of Fed officials voted for a 50 bps rate, pushing interest rates lower to 4.75%-5.00%, to revive the labor market strength.
On the contrary, a further slowdown in inflationary pressures could restore the likelihood of Fed large rate cuts in November.
Daily digest market movers: Pound Sterling to be influenced by UK monthly GDP for August
- The Pound Sterling exhibits a mixed performance against its major peers on Thursday. The British currency is expected to remain on edge, with investors focusing on the United Kingdom's (UK) monthly Gross Domestic Product (GDP) and the factory data for August, which will be released on Friday.
- The UK economy is estimated to have expanded by 0.2% after remaining flat in July. The monthly Industrial, and Manufacturing production are expected to have grown by 0.2% after contracting in July. Signs of revival in activities in the manufacturing sector would improve the economic outlook, which will have a positive impact on the Pound Sterling.
- Meanwhile, the major trigger for the Pound Sterling will be market expectations for the Bank of England’s (BoE) outlook for the last quarter of the year. The BoE is expected to cut interest rates by 25 bps in one of the remaining two meetings in November or December. Traders have raised bets for rate cuts in November after last week’s speech from BoE Governor Andrew Bailey, in which he guided for an aggressive policy-easing cycle if price pressures ease further.
- BoE officials have remained worried about high inflation in the services sector due to robust wage growth. UK annual service inflation rose sharply to 5.6% in August from 5.2% in July.
Technical Analysis: Pound Sterling seems vulnerable near 1.3060
The Pound Sterling struggles to gain ground near 1.3060 against the US Dollar. The GBP/USD pair has fallen on the backfoot after falling below the upward-sloping trendline from the 28 December 2023 high of 1.2827. The near-term outlook of the Cable remains bearish as it trades below the 20- and 50-day Exponential Moving Averages (EMAs), which trade around 1.3180 and 1.3110, respectively.
The 14-day Relative Strength Index (RSI) declines to near 40.00. More downside would appear if the momentum oscillator falls below the above-mentioned level.
Looking up, the round-level resistance of 1.3100 and the 20-day EMA near 1.3180 will be a major barricade for Pound Sterling bulls. On the downside, the Pound Sterling would find support near the psychological figure of 1.3000.
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, also known as ‘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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