Pound Sterling weakens as UK core inflation surprisingly cools down
- The Pound Sterling underperforms its peers as UK CPI data signals that price pressures aren't as high as expected.
- UK core inflation unexpectedly fell to 3.5% in September, while headline inflation steadied.
- Optimism surrounding US-China trade talks continues to support the US Dollar.
The Pound Sterling (GBP) faces intense selling pressure against its major peers on Wednesday after the release of the United Kingdom (UK) Consumer Price Index (CPI) data for September.
The Office for National Statistics (ONS) reported that the core CPI – which excludes volatile components of food, energy, alcohol and tobacco – grew by a less-than-expected 3.5% on an annual basis. Economists forecasted underlying price pressures to have risen by 3.7% against the prior reading of 3.6%.
Headline inflation rose steadily by 3.8% on year, slower than estimates of 4.0%. On a monthly basis, prices remained flat after growing by 0.3% in August.
Inflation in the services sector, which is closely tracked by the Bank of England (BoE), remained steady at 4.7%.
Signs of easing price pressures would bolster market expectations of more interest rate cuts by the BoE in the remainder of the year. Last week, BoE dovish expectations increased after the release of the employment data for the three months ending August, which showed a higher jobless rate and a slowdown in wage growth.
Daily digest market movers: Pound Sterling continues underperformance against US Dollar
- The Pound Sterling declines to near 1.3330 against the US Dollar during Wednesday’s European session. The GBP/USD pair extends its losing streak for the fourth trading day. The Cable slumps after the release of the UK inflation data, which showed signs that price pressures have peaked for now.
- Additionally, the strength of the US Dollar is also contributing to weakness in the GBP/USD pair. During the press time, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, trades firmly near Tuesday’s high around 99.00.
- The US Dollar edges up due to optimism that the United States (US) and China will reach a trade deal soon. US President Donald Trump has been expressing confidence that both nations will reach a fair deal. On Tuesday, Trump also maintained a positive tone towards the US-China trade deal, but expressed caution over the likelihood of the meeting with Chinese leader Xi Jinping in South Korea later this month.
- “So now we're going to have a fair deal, and I think we're going to have a very successful meeting,” Trump said on Tuesday. However, the US president added later that the meeting “Maybe it won't happen," Yahoo news reported.
- Meanwhile, growing hopes that the US federal government could reopen this week have also supported the US Dollar. The US Senate Minority Leader Chuck Schumer said on Tuesday that the Democrat House leader Hakeem Jeffries and him reached out to Trump to sit down and negotiate a possible reopening of the government, Reuters reported.
- On the economic front, investors await the delayed US CPI data for September, which will be published on Friday. The inflation data will significantly influence market expectations for the Federal Reserve’s (Fed) monetary policy outlook.
- Economists expect the US headline CPI to have grown at a faster pace of 3.1% on an annuali basis, up from the prior 2.9% advance, with core figures rising steadily by 3.1%.
Technical Analysis: Pound Sterling extends downside to near 1.3330
The Pound Sterling falls further to near 1.3330 against the US Dollar on Wednesday. The GBP/USD pair slides after failing to exceed the level marked by the 20-day Exponential Moving Average (EMA), which trades around 1.3407.
The 14-day Relative Strength Index (RSI) falls to near 40.00. A fresh bearish momentum would emerge if the RSI drops below that level.
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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