Pound Sterling trades near fresh three-month low against US Dollar ahead of inflation data
- The Pound Sterling trades back and forth near a three-month low of around 1.2750 against the US Dollar as investors brace for US inflation data for October.
- Market expectations for the Fed to cut interest rates in December have slightly diminished.
- Investors await BoE Mann’s speech and a slew of Fed speakers for fresh interest rate guidance.
The Pound Sterling (GBP) consolidates in a tight range near a fresh three-month low around 1.2750 against the US Dollar (USD) in Wednesday’s London session. The GBP/USD pair trades quietly as investors await the United States (US) Consumer Price Index (CPI) data for October, which will be published at 13:30 GMT. The US Dollar Index (DXY), which gauges the Greenback’s value against six major currencies, clings to gains at around 106.00, the highest level seen in more than six months.
Economists expect the headline inflation to accelerate to 2.6% from 2.4% in September, with the core CPI – which excludes volatile food and energy prices – rising steadily by 3.3% year-on-year. The monthly headline and core CPI are estimated to have risen steadily by 0.2% and 0.3%, respectively.
The inflation data isn’t expected to significantly impact market expectations for the Federal Reserve’s (Fed) likely monetary policy action in the December meeting unless there is a sharp divergence from consensus. Recent commentary from a majority of Fed officials indicated that they are confident about the disinflation trend remaining on track to the bank’s target of 2%.
Still, Minneapolis Federal Reserve Bank President Neel Kashkari struck a cautious note on Tuesday at a Yahoo! Finance event. "If inflation surprises to the upside before December, that might give us pause,” he said. Kashkari added that the monetary policy is "modestly restrictive right now," and he expects economic growth to persist. When asked about the impact of President-elect Donald Trump’s policies on the inflation outlook, Kashkari said: “The tariff is a one-time increase in prices, that's not inflationary in itself.”
President-elect Donald Trump has vowed to raise import tariffs by 10% and lower corporate taxes in his election campaign.
According to the CME FedWatch tool, the probability for the Fed to reduce interest rates by 25 basis points (bps) to 4.25%-4.50% in December is 62%, down from 70% a week ago.
Daily digest market movers: Pound Sterling remains vulnerable against its major peers
- The Pound Sterling stays on backfoot in European trading hours on Wednesday after a sharp sell-off on Tuesday. The British currency tumbled after the United Kingdom (UK) labor market data for three months ending September showed that the Unemployment Rate rose more than expected to 4.3%. Fresh payrolls also came in lower at 219K against the 373K jobs added in three months ending August.
- "The higher (UK) unemployment rate could see the market start to price in a higher chance of a rate cut from the Bank of England (BoE) next month," according to analysts at XTB.
- However, not all components of the labor market data were unfavorable for the Pound Sterling as Average Earnings data, a key measure of wage growth that drives consumer spending, came in higher than expected.
- After the employment data release, the comments from BoE Chief Economist Huw Pill at the conference of Swiss Bank UBS suggested that he is slightly concerned over inflationary pressures remaining persistent. "As we saw in the labour market data that was released this morning, pay growth remains quite sticky at elevated levels and levels that - given the outlook for productivity growth in the UK - are hard to reconcile with the UK inflation target,” Pill said, Reuters reported.
- In Wednesday’s session, investors will pay close attention to BoE external member Catherine Mann’s speech, which is scheduled at 09:45 GMT. Mann, an outspoken hawk, supported leaving interest rates unchanged at 5% in a policy meeting last week when all other eight Monetary Policy Committee (MPC) members voted for a 25 bps interest rate cut. In the US session, several Fed officials are also set to speak.
Technical Analysis: Pound Sterling stays below 200-day EMA
The Pound Sterling wobbles above the three-month low near 1.2700 against the US Dollar. The GBP/USD weakened sharply on Tuesday, breaking below the 200-day Exponential Moving Average (EMA), which trades around 1.2860. The overall trend of the Cable turned broadly negative after price action fell below the lower boundary of the rising channel, which set a bearish reversal.
A bearish momentum has kicked in with the 14-day Relative Strength Index (RSI) falling below 40.00.
Looking down, the August low at 1.2665 will be a major cushion for Pound Sterling bulls. On the upside, the Cable will face resistance 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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