Pound Sterling grips gains against US Dollar after softer-than-expected US inflation data
- The Pound Sterling holds onto gains near 1.3300 against the US Dollar as the Greenback suffers after soft US inflation data for April.
- The US headline CPI grew by 2.3%, the lowest level in over four years.
- Investors await the flash Q1 UK GDP data scheduled for Thursday for further cues about the health of the economy.
The Pound Sterling (GBP) trades firmly around 1.3300 against the US Dollar (USD) in Wednesday’s European session, near Tuesday’s high. The GBP/USD pair clings to gains as the US Dollar retreats after the release of the softer-than-expected United States (US) Consumer Price Index (CPI) data for April on Tuesday.
US headline inflation fell to 2.3% year-on-year, the lowest level seen since February 2021. The core CPI – which excludes volatile food and energy prices – grew steadily by 2.8%, as expected. On month, both headline and core CPI grew at a slower pace of 0.2%.
Technically, signs of cooling inflationary pressures should lead traders to support bets of an interest-rate cut by the Federal Reserve (Fed). However, market expectations for the Fed to leave interest rates steady in the July meeting have not diverged even an inch from the levels seen on Monday, a day prior to the release of US inflation data.
According to the CME FedWatch tool, the probability for the Fed to keep interest rates in the current range of 4.25%-4.50% in July remained steady at 61.4%. However, it is up significantly from 29.8% seen last week after the US and China announced a substantial reduction in tariffs.
Investors have taken the agreement with China as a favorable event for the US economic outlook, forcing them to delay expectations for interest rate cuts and offsetting the effects of declining inflation. Meanwhile, US President Donald Trump continues to endorse the need for rate cuts, strengthening his argument in the wake of falling prices of significant goods.
"No Inflation, and Prices of Gasoline, Energy, Groceries, and practically everything else, are DOWN!!! THE FED must lower the RATE, like Europe and China have done," Trump said on Truth Social. Trump criticized Fed Chair Jerome Powell for not lowering interest rates: "What is wrong with Too Late Powell? Not fair to America, which is ready to blossom? Just let it all happen, it will be a beautiful thing!” Trump added.
Daily digest market movers: Pound Sterling trades steady in calm day for markets
- The Pound Sterling trades cautiously against its major peers on Wednesday as investors reassess market expectations for the Bank of England’s (BoE) monetary policy outlook for the remainder of the year after the release of the labor market data for the three months ending March on Tuesday.
- The data showed lower job growth, a higher Unemployment Rate, and slowing wage growth. It seems that businesses lightened their hiring process ahead of an increase in employers’ contributions to social security schemes that came into effect in April.
- Meanwhile, moderate growth in Average Earnings data is expected to provide relief to BoE officials. Policymakers pay close attention to the wage growth data as it is a major driver of inflation in the services sector, a key factor behind persistent United Kingdom (UK) price pressures.
- Despite increasing hopes of cooling price pressures, BoE Chief Economist Huw Pill warned on Tuesday that inflation could continue to prove stronger-than-expected, which might strengthen the need to maintain interest rates higher. “I remain concerned that we have seen a sort of structural change in price and wage-setting behaviour, maybe driven by the type of things that were involved in models of the inflation process from the ’70s and ’80s," Pill said in a conference at the London School of Economics, Reuters reported.
- Going forward, the major trigger for the Pound Sterling will be the preliminary UK Q1 Gross Domestic Product (GDP) and factory data, which will be released on Thursday. The UK economy is expected to have expanded by 0.6% in the first quarter of the year, faster than the 0.1% growth seen in the last quarter of 2024.
Technical Analysis: Pound Sterling clings to gains near 1.3300
The Pound Sterling holds onto gains around 1.3300 against the US Dollar on Wednesday. The GBP/USD pair returns above the 20-day Exponential Moving Average (EMA), which trades around 1.3255, suggesting that the trend has turned bullish again.
The 14-day Relative Strength Index (RSI) oscillates inside the 40.00-60.00 range. A fresh bullish momentum would appear if the RSI breaks above 60.00.
On the upside, the three-year high of 1.3445 will be a key hurdle for the pair. Looking down, the psychological level of 1.3000 will act as a major support area.
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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