Pound Sterling trades with caution near three-week lows ahead of US inflation data
- The Pound Sterling stays near the three-week low around 1.3430 against the US Dollar.
- Investors expect US inflation to have accelerated, while the UK CPI is estimated to have risen steadily in June.
- Market sentiment remains jittery as trade tensions between the US and the EU persist.
The Pound Sterling (GBP) trades cautiously near the three-week low around 1.3430 against the US Dollar during the European trading session on Tuesday. The GBP/USD pair is expected to see more volatility ahead, with investors focusing on the United States (US) Consumer Price Index (CPI) data for June, which will be published at 12:30 GMT.
Ahead of the US inflation data, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, trades flat near the three-week high around 98.00.
Investors will pay attention to the US CPI data, as it will provide clarity about the impact of tariffs imposed by President Donald Trump on inflation . Federal Reserve (Fed) officials have been arguing in favor of keeping interest rates at their current levels until they get clarity about how much Trump’s tariff policies will impact prices, and the CPI release could offer some insights on the matter.
Still, considering the timing of the announcement of reciprocal tariffs by US President Trump for 22 nations, notably Japan, South Korea, the European Union (EU), and its North American peers, the impact of tariffs will majorly be seen in August CPI figures.
According to the estimates, the US headline inflation rose to 2.7% on year from 2.4% in May. The core CPI – which strips off volatile food and energy items – is expected to have grown by 3%, faster than the prior release of 2.8%. On month, both headline and the core CPI are seen rising by 0.3%.
Daily digest market movers: Pound Sterling trades flat ahead of UK data-packed week
The Pound Sterling trades broadly calm against its peers on Tuesday. The British currency is expected to trade sideways as investors await the release of the United Kingdom (UK) Consumer Price Index (CPI) data for June and the labor market data for the three-months ending May, which are scheduled for Wednesday and Thursday, respectively.
Economists expect the UK CPI to have grown at a steady 3.4%, a scenario that generally should prompt the Bank of England (BoE) to hold interest rates steady as inflation is still above the 2% target. However, traders are pricing in a 25-basis point (bps) interest rate reduction by the UK central bank in the August policy meeting amid growing labor market and trade war risks.
UK employers have slowed down their hiring plans to offset the impact of an increase in the employers’ contributions to social security schemes, which became effective in April. In the Autumn Statement, Chancellor of the Exchequer Rachel Reeves raised employers’ contribution to National Insurance (NI) from 13.8% to 15%.
Meanwhile, the Office for National Statistics (ONS) is expected to show that the ILO Unemployment Rate steady at 4.6%, remaining at the highest level since the three-months ending in August 2021.
On the global front, investors seek clarity on trade talks between the US and the European Union (EU). US President Trump confirmed on Monday that Washington is still in talks with Brussels to secure a trade pact before the August 1 deadline, despite having announced 30% tariffs on imports from the EU over the weekend. Signs of intensifying trade tensions between the US and the EU would be unfavorable for riskier assets, given the high volume of business between both economies.
Technical Analysis: Pound Sterling trades below 20 and 50-day EMAs
The Pound Sterling trades close to a three-week low around 1.3430 against the US Dollar. The near-term trend of the GBP/USD pair has turned bearish as it stabilizes below the 20-day and 50-day Exponential Moving Averages (EMAs), which trade around 1.3558 and 1.3477, respectively.
The 14-day Relative Strength Index (RSI) falls below 40.00. A fresh bearish momentum would emerge if the RSI stays below the same.
Looking down, the June 23 low of 1.3370 will act as a key support zone. On the upside, the three-and-a-half-year high around 1.3800 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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