Pound Sterling extends downside against US Dollar as Sino-US trade tensions recede
- The Pound Sterling falls further to near 1.3370 against the US Dollar, slides for the third consecutive day.
- Receding US-China trade tensions improve the US Dollar’s appeal.
- This week, investors will pay close attention to the UK-US CPI data for September.
The Pound Sterling (GBP) extends its losing streak against the US Dollar (USD) for the third trading day on Tuesday. The GBP/USD pair slides further to near 1.3370 as the US Dollar extends its recovery move amid growing expectations that the United States (US) and China will reach a trade deal soon.
During the press time, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, trades 0.25% higher to near 98.85.
On Monday, US President Donald Trump expressed confidence that China will make a deal with Washington after his meeting with Chinese leader Xi Jinping at the sidelines of Asia Pacific Economic Cooperation summit in South Korea later this month.
“I think we’re going to end up having a fantastic deal with China," Trump said and added, "It’s going to be a great trade deal. It’s going to be fantastic for both countries, and it’s going to be fantastic for the entire world,” Bloomberg reported.
Trade tensions between the US and China triggered after Beijing announced export controls on rare earth minerals. In response, the US imposed additional 100% tariffs on imports from China.
Daily digest market movers: Pound Sterling weakens against US Dollar ahead of UK-US CPI data
- The Pound Sterling trades lower against the US Dollar early in a week that will see the United Kingdom (UK) and the United States (US) CPI data, which will be published on Wednesday and Friday, respectively.
- Inflation in the UK economy is expected to have grown at a faster pace in September, a scenario that might force the Bank of England (BoE) to perform a delicate balancing act between higher price pressures and cooling job market conditions in upcoming monetary policy meetings.
- The Office for National Statistics (ONS) is expected to show that the headline CPI rose at an annual pace of 4% in September, in line with BoE’s prediction, and compared to previous 3.8%. The UK central bank stated in September's meeting that inflationary pressures would peak around 4% in the current month. Meanwhile, the core CPI – which excludes volatile items – is estimated to have grown at a faster pace of 3.7% against 3.6% in August.
- Last week, BoE Monetary Policy Committee (MPC) member Catherine Mann, an outspoken hawk, warned of upside inflation risks and urged caution on further interest rate cuts. Mann added that labor market conditions have weakened only at a moderate pace, which do not signal urgency on interest rate cuts. “What has transpired is that the labour market has modestly loosened but it is not falling off of the cliff,” Mann said.
- Meanwhile, price pressures in the US economy are expected to have grown at a slightly faster pace in September. The US headline CPI is estimated to have grown at a faster pace of 3.1% against the prior reading of 2.9%, with core readings rising steadily by 3.1%. Month-on-month headline and the core CPI are expected to have risen by 0.4% and 0.3%, respectively.
- Ahead of the US inflation data, traders seem confident that the Federal Reserve (Fed) will reduce interest rates in its both two monetary policy meetings remaining this year, according to data from the CME FedWatch tool.
Technical Analysis: Pound Sterling slides below 1.3400
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The Pound Sterling falls further to near 1.3370 against the US Dollar on Tuesday. The GBP/USD pair struggles to return above the 20-day Exponential Moving Average (EMA), which trades around 1.3417.
The 14-day Relative Strength Index (RSI) oscillates inside the 40.00-60.00 range, which indicates a sideways trend.
Looking down, the August 1 low of 1.3140 will act as a key support zone. On the upside, the psychological level 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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