Pound Sterling trades with caution ahead of US PCE inflation data
- The Pound Sterling remains under pressure around 1.3330 against the US Dollar ahead of the US PCE Price Index data for August.
- The US economy grew at a robust pace of 3.8% in the second quarter of the year.
- BoE monetary policymaker Megan Greene warns of upside inflation risks.
The Pound Sterling (GBP) trades cautiously around 1.3330 against the US Dollar (USD) during the European trading session on Friday, around the seven-week low at 1.3324 posted on Thursday. The GBP/USD pair faces selling pressure as the US Dollar (USD) trades firmly ahead of the United States (US) Personal Consumption Expenditure Price Index (PCE) data for August, which will be published at 12:30 GMT.
At the time of writing, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, trades firmly near its fresh four-week high around 98.40 posted on Thursday.
Investors will closely monitor the US PCE inflation data to get cues about whether tariffs imposed by President Donald Trump are still prompting price pressures. Lately, a majority of Fed officials have advised caution on further interest rate cuts as risks to inflation have shifted to the upside.
The US core PCE inflation, which is the Fed’s preferred inflation gauge, is estimated to have grown at a moderate pace of 0.2% on a monthly basis against the prior reading of 0.3%, with yearly figures rising steadily by 2.9%.
Signs of price pressures cooling down would prompt market expectations for more interest rate cuts by the Fed in the remainder of the year. The central bank delivered its first cut in the monetary policy meeting last week, reducing rates by 25 basis points (bps) to 4.00%-4.25%. On the contrary, hot inflation figures would diminish Fed dovish expectations.
According to the CME FedWatch tool, the probability of the Fed cutting interest rates by 50 bps by the year-end eased to 62% from 78.6% seen a week ago.
Daily digest market movers: Investors seek fresh cues on BoE’s monetary policy outlook
- The Pound Sterling trades higher against its major peers on Friday as investors expect the Bank of England (BoE) to hold interest rates steady at 4% in the remainder of the year. The BoE is unlikely to cut rates in the near term as inflationary pressures in the United Kingdom (UK) economy are proving to be persistent.
- On Wednesday, BoE Monetary Policy Committee (MPC) member Megan Greene, who voted to hold interest rates steady in the last two monetary policy meetings, warned of upside inflation risks and advised caution on loosening the monetary policy further. She added that the impact of the US tariffs-driven global trade war is fizzing out and an economic recovery looks likely. “Trade risks have abated, and we [BoE] expect growth to '“rebound'”, which won’t led labor market risks materializing,” Greene said.
- Contrary to Megan Greene’s caution on price pressures, the monetary policy statement of last week’s meeting showed that consumer inflation would peak around 4% in September.
- On the US Dollar front, the major currency rallied on Thursday after upbeat revised United States (US) Q2 Gross Domestic Product (GDP) and lower Initial Jobless Claims for the week ending September 20.
- Revised US Q2 GDP data showed that the economy grew at an annualized pace of 3.8%, faster than the preliminary estimate of 3.3%. Meanwhile, the number of individuals seeking jobless benefits for the first time came in lower at 218K. Economists expected Initial Jobless Claims to come at 235K, marginally higher than the prior reading of 232K.
- Meanwhile, US tariff fears have renewed again as Trump has increased import duties on pharmaceuticals, heavy-duty trucks, and furniture.
Technical Analysis: Pound Sterling breaks Rising Channel on the downside
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The Pound Sterling struggles to gain ground near its seven-week low around 1.3330 against the US Dollar on Friday. The GBP/USD pair has weakened as it has delivered a breakdown of the Rising Channel formation, resulting in a bearish reversal.
The near-term trend of the Cable is bearish as it stays below the 20-day Exponential Moving Average (EMA), which trades around 1.3488.
The 14-day Relative Strength Index (RSI) breaks below 40.00 on the daily chart. A fresh bearish momentum would emerge if the RSI stays below that level.
Looking down, the August 1 low of 1.3140 will act as a key support zone. On the upside, the psychological figure of 1.3500 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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