Pound Sterling remains on tenterhooks ahead of US Inflation data
- The Pound Sterling turns sideways near 1.2680 after correcting from 1.2700 with eyes on US inflation data for March.
- The UK monthly GDP data for February will provide fresh cues about the economy’s performance.
- The UK’s rising cost-of-living crisis supports BoE rate cut prospects.
The Pound Sterling (GBP) exhibits uncertainty in Wednesday’s London session ahead of the United States Consumer Price Index (CPI) data for March, which will be published at 12:30 GMT. Economists expect US inflation to remain relatively high in March due to increasing Oil prices, insurance costs and rentals.
Hot price pressures would shift market expectations of Federal Reserve (Fed) rate cuts to the third quarter of this year. On the contrary, softer-than-expected numbers would likely reinforce speculation of rate cuts in June.
On the domestic front, the Pound Sterling will be guided by the United Kingdom's monthly Gross Domestic Product (GDP) and the factory data for February, which will be published on Friday.
The GDP data will give a snapshot of the economy's state. The factory data represents the country’s manufacturing sector, a leading indicator of overall demand. Weak numbers would boost expectations for Bank of England (BoE) early rate cuts, while better-than-expected data will indicate that the economy is returning to recovery.
Daily digest market movers: Pound Sterling awaits US inflation for fresh guidance
- The Pound Sterling faces some sell-off while attempting to surpass the round-level resistance of 1.2700 amid uncertainty ahead of the United States consumer price inflation data for March.
- Annual headline inflation is forecast to accelerate to 3.4% from the 3.2% recorded in February. Core inflation, which strips off volatile food and energy prices, is expected to decelerate to 3.7% from 3.8% in the same period. On a monthly basis, both headline and core CPI are forecasted to have increased at a slower pace of 0.3% against 0.4% in February.
- The expected monthly rise in inflation would likely be insufficient to convince Federal Reserve (Fed) policymakers that inflation is returning to the desired rate of 2%. For inflation to come down to the 2% target, the monthly CPI needs to increase at a steady pace of 0.17% for the entire year.
- The US Dollar Index (DXY), which tracks the US Dollar’s value against six major currencies, rebounds to 104.15. Uncertainty among market participants ahead of the US inflation data offered support to the US Dollar. The inflation data will provide hints about when the Federal Reserve could start reducing interest rates.
- On the United Kingdom front, the rising burden of higher cost of living on households has prompted demand for rate cuts by the Bank of England. The latest survey by the Financial Conduct Authority (FCA) showed that individuals struggling to pay bills and credit repayments fell in January annually. The agency estimated that 7.4 million individuals faced problems in addressing their monthly expenses, lower than the 10.9 million recorded in January 2023 but still significantly higher than the 5.8 million recorded in February 2020.
- Investors expect the BoE to pivot to rate cuts after the June meeting. The speculation was propelled after Governor Andrew Bailey said market expectations for two or three rate cuts this year are “reasonable.”
Technical Analysis: Pound Sterling faces pressure near 1.2700
The Pound Sterling struggles to extend upside above the round-level resistance of 1.2700. The GBP/USD pair is expected to remain sideways as investors await the US CPI data. The Cable trades inside Tuesday’s trading range, suggesting a sideways trend. The 200-day Exponential Moving Average (EMA) near 1.2570 supports the Pound Sterling bulls.
On the downside, the psychological level of 1.2500 plotted from December 8 low will be a major support for the Cable.
The 14-period Relative Strength Index (RSI) oscillates inside the 40.00-60.00 range, suggesting indecisiveness among market participants.
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, aka ‘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.