Pound Sterling gains with focus on UK-US Inflation
- The Pound Sterling moves higher against the US Dollar on improved market sentiment.
- BoE’s Mann warns about upside risks to price pressures.
- The Fed is expected to cut interest rates by 25 bps in September.
The Pound Sterling (GBP) gains against its major peers, except the Australian Dollar (AUD) and the New Zealand Dollar (NZD), in Monday’s London session. The British currency strengthens, with investors focusing on the United Kingdom (UK) Employment data for the three months ending June and the Consumer Price Index (CPI) data for July, which will be published on Tuesday and Wednesday, respectively.
The UK Employment report is expected to show that the ILO Unemployment Rate rose to 4.5% from the prior release of 4.4%. Investors will also focus on the Average Earnings Excluding Bonuses data, a key measure of wage growth that has been a key driver to high inflation in the service sector. The wage growth measure is estimated to have decelerated significantly to 4.6% from the former reading of 5.7%. An expected decline in wage growth measures will prompt expectations of subsequent interest rate cuts by the Bank of England (BoE).
While UK wage growth is expected to soften significantly, BoE’s Monetary Policy Committee (MPC) member Catherine Mann said in an Economics Show podcast with the Financial Times in Monday’s Asian hours, “Goods and services prices were set to rise again, and wage pressures in the economy could take years to dissipate.” Mann remained concerned over upside risks to inflation despite the return of annual headline inflation to the bank’s target of 2%.
Daily digest market movers: Pound Sterling ahead of busy UK data week
- The Pound Sterling edges higher against the US Dollar (USD) in Monday’s European trading hours. The GBP/USD pair rises gradually due to a steady market sentiment. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, continues consolidating above 103.00.
- Current market sentiment exhibits a steady risk appetite; however, volatility is around the corner as the United States (US) CPI data for July is scheduled to be released on Wednesday. The inflation data will significantly influence market expectations for Federal Reserve (Fed) rate cuts this year.
- Economists expect that the monthly headline and core CPI, which excludes volatile food and energy prices, rose by 0.2%. The annual headline and core inflation are expected to have decelerated by 10 bps to 2.9% and 3.2%, respectively.
- According to the CME FedWatch tool, 30-day Federal Funds futures pricing data shows that traders see a 46.5% chance that interest rates will be reduced by 50 basis points (bps) in September. The likelihood of a 50 bp rate reduction has weakened significantly from 85%, recorded a week ago. A significant fall in a short time without the release of any top-tier data suggests that the high probability for big rate cuts prompted by weak US Employment data for July, which bolstered fears of a potential recession, was a mere overreaction.
- Meanwhile, the confidence of Fed policymakers that price pressures are on track to return to the desired rate of 2% has increased. Speaking at the Kansas Bankers Association on Friday, Fed Governor Michelle Bowman said, “Should the incoming data continue to show that inflation is moving sustainably toward our 2% goal, it will become appropriate to gradually lower the federal funds rate to prevent monetary policy from becoming overly restrictive on economic activity and employment.” She added, “But we need to be patient and avoid undermining continued progress on lowering inflation by overreacting to any single data point,” Reuters reported.
Technical Analysis: Pound Sterling rebounds from 1.2700
The Pound Sterling recovers after a positive divergence formation on a daily timeframe, in which the asset continues to build higher lows while a momentum oscillator makes lower lows. This generally results in a resumption of the uptrend, but it should be confirmed with more indicators.
The 14-day Relative Strength Index (RSI) indicator finds a cushion near 40.00, exhibiting signs of buying interest at lower levels.
The pair continues to hold the 200-day Exponential Moving Average (EMA), which trades at around 1.2650.
More downside could appear if the GBP/USD breaks below Thursday’s low of 1.2665. This would expose the June 27 low at 1.2613, followed by the April 29 high at 1.2570.
On the flip side, a recovery move above the August 6 high at 1.2800 would drive the pair towards the August 2 high at 1.2840 and the round-level resistance of 1.2900.
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.
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