Pound Sterling trades with caution as markets await UK inflation data
- The Pound Sterling faces mild selling pressure against its major peers ahead of the UK inflation data to be released on Wednesday.
- UK inflation is expected to have fallen slightly in October.
- Traders trim Fed dovish bets as officials warn of upside inflation risks.
The Pound Sterling (GBP) trades subdued against its major currency peers, except antipodeans, on Tuesday as investors turn cautious ahead of the United Kingdom (UK) Consumer Price Index (CPI) data for October, which will be released on Wednesday.
Investors will pay close attention to the UK inflation data to get cues about whether the Bank of England (BoE) will resume its monetary-easing campaign in the December policy meeting.
The CPI report is expected to show that headline inflation fell to 3.6% year-on-year from 3.8% in September. In the same period, the core CPI – which excludes volatile items such as food, energy, alcohol and tobacco – is expected to have decelerated to 3.4% from the prior reading of 3.5%. On month, headline inflation is seen up 0.4% after remaining flat in September.
Signs of cooling price pressures would prompt bets supporting an interest rate cut by the BoE in the December meeting. On the contrary, sticky figures are unlikely to act as a major drag on BoE dovish speculation due to weak job market conditions and cooling Gross Domestic Product (GDP) growth. Last week, the labour market data for September showed that the Unemployment Rate jumped to 5%.
Later this week, investors will also focus on the UK Retail Sales data for October and the preliminary S&P Global Purchasing Managers’ Index (PMI) data for November, which will be released on Friday.
Daily digest market movers: Pound Sterling trades sideways against US Dollar
- The Pound Sterling trades in a tight range around 1.3160 against the US Dollar (USD) during the European trading session on Tuesday. The GBP/USD pair is expected to remain sideways as investors await the United States (US) Nonfarm Payrolls (NFP) data for September, which is scheduled for released on Thursday.
- At the press time, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, trades subduedly around 99.50.
- The impact of the NFP data will be significant as major economic releases in over six weeks have remained halted due to the US government shutdown. Investors will monitor the employment data to get cues about the current labour market trend. August’s NFP report demonstrated a sharp slowdown in the hiring trend, which prompted market bets supporting more interest rate cuts by the Federal Reserve (Fed) this year.
- Since the US NFP data for August was released, the Fed has reduced interest rates two times by 50 basis points (bps) cumulatively to 3.75%-4.00%.
- Meanwhile, traders have trimmed Fed dovish expectations as officials have expressed caution about further interest rate cuts, citing upside inflation risks.
- "The current policy stance is still somewhat restrictive, but we have moved it closer to its neutral level that neither restricts nor stimulates the economy," Fed Vice Chair Philip Jefferson said at an event in Kansas City on Monday, Reuters reported. He warned that further interest rate cuts would likely “stop putting downward pressure on inflation”.
Technical Analysis: Pound Sterling wobbles around 1.3160
The Pound Sterling trades inside Monday’s trading range around 1.3160 against the US Dollar at the time of writing. The overall trend of the pair remains bearish as it trades below the 200-day Exponential Moving Average (EMA), which is around 1.3276.
The 14-day Relative Strength Index (RSI) strives to hold above 40.00. A fresh bearish momentum would emerge if the RSI falls back below that level.
Looking down, the April low near 1.2700 will act as a key support zone. On the upside, the October 28 high around 1.3370 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.