Pound Sterling ticks down against US Dollar ahead of US inflation data
- The Pound Sterling edges down below 1.3500 against the US Dollar ahead of the US CPI data for May.
- Soft UK employment data paves the way for a BoE interest rate cut in August.
- Trade tensions between the US and China appear to have eased after a two-day meeting in London.
The Pound Sterling (GBP) trades lower to near 1.3480 against the US Dollar (USD) during European trading hours on Wednesday. The GBP/USD pair ticks down as the US Dollar trades broadly stable ahead of the United States (US) Consumer Price Index (CPI) data for May, which will be published at 12:30 GMT.
The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, edges up slightly to near 99.15.
Investors will pay close attention to the US inflation data as it will influence market expectations for the Federal Reserve’s (Fed) monetary policy outlook. As measured by the CPI, headline inflation is expected to have risen to 2.5% on year from 2.3% in April. In the same period, core CPI – which excludes volatile food and energy prices – is expected to have grown by 2.9%, faster than the prior 2.8%. On month, both headline and core CPI are expected to have grown by 0.2% and 0.3%, respectively.
Signs of accelerating price pressures would allow Federal Reserve (Fed) officials to commit to holding interest rates steady until they get clarity over the outcome of the tariff policy by US President Donald Trump after returning to the White House.
Even if inflation data came in lower than expected, Fed policymakers are unlikely to support early interest rate cuts, as they have been citing concerns over de-anchoring consumer inflation expectations under the leadership of Donald Trump.
On the global front, trade tensions between the US and China have de-escalated somewhat as the White House has signaled a positive outcome from the two-day meetings between trade representatives of both countries held in London. US Secretary of Commerce Howard Lutnick expressed confidence that both nations will roll back export restrictions.
Daily digest market movers: Pound Sterling extends underperformance against its peers
- The Pound Sterling extends its downside move against its major peers on Wednesday, extending the previous day’s sell-off. The British currency faces sharp selling pressure on Tuesday after the United Kingdom (UK) Office for National Statistics (ONS) reported a weak set of labor market data for three months leading up to April.
- The data showed cracks emerging in the UK labor market as the decision by Chancellor of the Exchequer Rachel Reeves to raise employers’ contribution to social security schemes to 15% from 13.8% went into effect in April.
- According to the report, the Unemployment Rate accelerated to 4.6%, the highest level seen since July 2021. Also, labor demand slowed significantly, and wages grew at a moderate pace.
- Soft UK employment data has increased market expectations that the Bank of England (BoE) will reduce interest rates by more than what investors had projected earlier. “Weak jobs and slower pay growth may tip the balance in favour of an August cut," HSBC analysts said.
- Later this week, investors will focus on the UK monthly Gross Domestic Product and the factory data for April, which will be released on Thursday. The UK economy is expected to have shrunk by 0.1% after expanding 0.2% in March. On month, both the Manufacturing and Industrial Production data are expected to have contracted again.
Technical Analysis: Pound Sterling corrects to near 20-day EMA
The Pound Sterling declines to near the 20-Day Exponential Moving Average (EMA) at around 1.3467, indicating uncertainty in the near-term trend. The GBP/USD pair faced selling pressure on Tuesday after failing to revisit the three-year high of 1.3617.
The 14-day Relative Strength Index (RSI) falls sharply towards the 50 neutral level, indicating that the upside potential is capped.
On the upside, the three-year high of 1.3617 will be a key hurdle for the pair. Looking down, the May 15 low of 1.3258 will act as a key support zone.
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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