Pound Sterling advances against US Dollar on soft US PPI, Retail Sales data
- The Pound Sterling moves higher to near 1.3330 against the US Dollar as the Greenback suffers after the release of weak US economic data.
- The Fed is expected to keep interest rates steady in the next two policy meetings.
- Investors await the UK CPI data next week for fresh cues about the BoE’s monetary policy outlook.
The Pound Sterling (GBP) rises further to near 1.3330 against the US Dollar (USD) in Friday’s European session, extending Thursday’s upside move. The GBP/USD pair gains as the US Dollar (USD) remains on the backfoot after the release of the softer-than-expected Producer Price Index (PPI) data for April.
The US Dollar Index (DXY), which gauges the Greenback’s value against six major currencies, trades lower to near 100.50.
US PPI data showed that producer prices unexpectedly fell compared with the previous month due to a sharp slowdown in the hospitality sector. According to a report from Reuters, the producer inflation was pulled down by a sharp drop in tourist travel, which hurt airline ticket sales, hotel, and motel bookings. The report also showed signs that tourists are boycotting travelling to the US in the wake of President Donald Trump’s protectionist trade policy, immigration crackdown, as well as references to Canada as the 51st state, and a desire to acquire Greenland.
Soft Retail Sales data has also weighed on the US Dollar. Retail Sales, a key measure of consumer spending, rose by just 0.1%, substantially slower than the March reading of 1.5%. It appears that households rushed to shops in March in anticipation of reciprocal tariffs to be introduced by US President Trump. Auto sales contracted by 0.1%, against a 5.5% surge seen in March. Also, durable items saw a moderate growth of 0.3% in April compared to a robust increase of 1.5% in the prior month.
Cooling producer inflation and soft Retail Sales data have led to a sharp correction in 10-year US Treasury Yields from their month high of 4.55% posted on Thursday to near 4.40% during European trading hours on Friday.
Despite the soft data, market expectations for the Federal Reserve (Fed) to keep interest rates unchanged in the next two policy meetings remained broadly steady as officials seem to be more inclined towards bringing consumer inflation expectations down rather than lowering borrowing rates to heal current economic concerns. According to the CME FedWatch tool, the probability for the Fed to leave rates steady in the range of 4.25%-4.50% in the June and July meetings is at 91.8% and 61.4%, respectively.
Daily digest market movers: Pound Sterling corrects against its major peers
- The Pound Sterling retraces against its major peers, except for the US Dollar, on Friday after a strong upside move the previous day. The British currency attracted significant bids on Thursday after the release of United Kingdom (UK) monthly and quarterly Gross Domestic Product (GDP) data, which showed that the economy expanded at a faster-than-expected pace.
- Strong GDP growth rate has provided room for Bank of England (BoE) officials to maintain interest rates at their current levels if inflation persists or even accelerates..
- This week, BoE Chief Economist Huw Pill warned that inflation could continue to prove stronger-than-expected: “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.". He stressed that high inflation would strengthen the need to maintain interest rates higher. Pill was one of the two Monetary Policy Committee (MPC) members, along with Catherine Mann, who voted to leave interest rates unchanged in the policy meeting last week. The BoE reduced its key borrowing rates by 25 basis points (bps) to 4.25%.
- To get fresh cues on the UK inflation, investors await the Consumer Price Index (CPI) data for April, which will be released on Wednesday. Signs of cooling inflationary pressures would add to market expectations that the BoE will cut interest rates again in the policy meeting in June.
Technical Analysis: Pound Sterling jumps above 1.3300
The Pound Sterling climbs above 1.3300 against the US Dollar on Friday. The GBP/USD pair holds above the 20-day Exponential Moving Average (EMA), which trades around 1.3256, suggesting that the near-term trend is bullish.
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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