Pound Sterling faces pressure as UK inflation seems to peak
- The Pound Sterling drops against its peers as UK core and service CPI cools down in August.
- Investors expect the BoE to hold interest rates steady on Thursday.
- The Fed is nearly certain to cut interest rates at 18:00 GMT.
The Pound Sterling (GBP) faces selling pressure against its major peers on Wednesday after the release of the United Kingdom (UK) Consumer Price Index (CPI) data for August. The Office for National Statistics (ONS) reported that the service inflation rose at a moderate pace of 4.7%, compared to 5.0% in July.
Signs of service inflation slowing would weigh on market expectations of no further interest rate cuts by the Bank of England (BoE) in the remainder of the year, which adds pressure on the Pound Sterling. Inflation in the services sector is closely tracked by the BoE Monetary Policy Committee (MPC) members while deciding on interest rates.
The core CPI – which excludes volatile items such as food, energy, alcohol, and tobacco – also slowed down to 3.6%, as expected, from 3.8% in July.
Meanwhile, the headline inflation has grown at a steady pace of 3.8%, but slower than the estimates of 3.9%. On a monthly basis, the headline CPI grew in line with expectations of 0.3%, faster than 0.1% in July.
The next major trigger for the Pound Sterling is the BoE’s interest rate decision on Thursday, in which the central bank is almost certain to hold borrowing rates at their current level of 4%.
Pound Sterling edges lower against US Dollar ahead of Fed’s monetary policy outcome
- The Pound Sterling ticks down to near 1.3640 against the US Dollar (USD) during the European trading session on Wednesday. The GBP/USD pair faces marginal selling pressure on signs of slowing UK inflation growth.
- Meanwhile, the US Dollar remains on the back foot amid firm expectations that the Federal Reserve (Fed) will cut interest rates in the monetary policy announcement at 18:00 GMT.
- At the time of writing, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, holds onto losses near a fresh two-month low of 96.60 posted on Tuesday.
- According to the CME FedWatch tool, traders see a 96% chance that the Fed will reduce interest rates by 25 basis points (bps) to the 4.00%-4.25% range, while the rest support a bigger reduction of 50 bps.
- As the Fed is widely anticipated to start the monetary-easing campaign, the next trigger for the US Dollar would be the Fed’s Summary of Economic Projections (SEP), which includes the dot plot, and Fed Chair Jerome Powell’s views on inflation and the labor market outlook. According to analysts at Morgan Stanley, the Fed is anticipated to cut interest rates by 25 bps in each of the remaining three policy meetings this year, indicating that borrowing rates will go lower to the range of 3.50%-3.75% by 2025.
- Fed dovish expectations were intensified by growing US labor market concerns and signs that the impact of tariffs on inflation won’t be persistent. Chair Powell also warned of downside labor market risks in his speech at the Jackson Hole Symposium in August, and added they could materialize quickly if the central bank delays policy adjustment.
- Additionally, investors will also focus on the newly added member, Stephen Miran, to the rate-setting committee. Market participants would like to know whether Miran's rate would be biased towards US President Donald Trump's economic agenda.
- Meanwhile, Fed Governor Lisa Cook is set to join her fellow Federal Open Market Committee (FOMC) members in the monetary policy announcement as the US appeals court blocked President Trump’s firing of Cook on mortgage allegations.
Technical Analysis: Pound Sterling holds ascending triangle pattern breakout
The Pound Sterling edges lower to near 1.3640 against the US Dollar on Wednesday. However, the overall trend of the GBP/USD pair remains bullish as it holds an ascending triangle formation breakout, which it delivered on Tuesday. The Cable also stays above the 20-day Exponential Moving Average (EMA), which trades around 1.3535.
The 14-day Relative Strength Index (RSI) trades above 60.00. A fresh upside momentum would emerge if the RSI holds above that level.
Looking down, the August 1 low of 1.3140 will act as a key support zone. On the upside, the July 1 high near 1.3800 will act as a key barrier.
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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