Pound Sterling declines against US Dollar ahead of US core PCE inflation
- The Pound Sterling prints a fresh two-week low at 1.2845 against the US Dollar on Friday as investors turn cautious ahead of the US core PCE Price index.
- The BoE is expected to cut interest rates next week.
- Robust US Q2 GDP growth has improved the economic outlook.
The Pound Sterling (GBP) posts a fresh two-week low at 1.2845 against the US Dollar (USD) in Friday’s London session. The GBP/USD pair faces sharp selling pressure amid uncertainty ahead of the United States (US) core Personal Consumption Expenditures price index (PCE) data for June, which will be published at 12:30 GMT.
The core PCE inflation data, the Federal Reserve’s (Fed) preferred inflation measure, is estimated to have decelerated to 2.5% year-over-year from May’s reading of 2.6%, with monthly price pressures growing steadily by 0.1%.
The scenario in which the underlying inflation declines expectedly or at a faster pace would be unfavorable for the US Dollar as it will cement expectations of early interest rate cuts by the Federal Reserve. On the contrary, hot inflation numbers would force traders to pare early rate-cut bets. According to the CME FedWatch tool, 30-day Federal Fund futures pricing data shows that the central bank will start reducing interest rates in September.
The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, exhibits a subdued performance near 104.30. The US Dollar failed to capitalize on robust US Q2 Gross Domestic Product (GDP) growth as the impact was offset by subsiding price pressures. The US economy expanded at a robust pace of 2.8% in the second quarter, double the 1.4% growth recorded in the first quarter. Still, speculation for Fed rate cuts in September remained intact as GDP Price Index decelerated at a slower-than-expected pace to 2.3%.
Daily digest market movers: Pound Sterling steadies as investors shift focus to BoE monetary policy
- The Pound Sterling exhibits a steady performance against its major peers on Friday. The British currency is expected to remain on the sidelines as investors shift focus to the Bank of England’s (BoE) monetary policy meeting, which is scheduled for Thursday.
- A Reuters poll on July 18-24 showed that more than 80% of economists said the BoE would announce a rate-cut decision in its August meeting for the first time in more than four years. The BoE will ditch its restrictive monetary policy framework, which it has been maintaining since the pandemic hit global markets.
- The BoE is expected to reduce its key borrowing rates by 25 basis points (bps) to 5% in the August meeting. However, traders see a 46% chance of the BoE pivoting to policy-normalization. It appears that the absence of BoE officials’ endorsement for rate cuts has limited BoE rate-cut expectations.
- Despite the return of the annual headline Consumer Price Index (CPI) in the United Kingdom (UK) to the central bank’s target of 2%, BoE policymakers hesitate to support interest rate cuts amid worries about strong wage growth momentum that has been resulting in sticky price pressures in the service sector.
- Also, signs of wage growth easing ahead remain absent due to the shortage of labor in the United Kingdom. The UK labor market has faced a shortage of workers for a long period due to voluntary retirements by individuals and the Brexit event.
- Meanwhile, the UK’s economic prospects remain firm due to expanding activities in manufacturing as well as the service sector and political stability after Prime Minister Keir Starmer’s outright victory in parliamentary elections.
Technical Analysis: Pound Sterling stabilizes below 1.2900
The Pound Sterling remains on the back foot against the US Dollar after sliding below the crucial support of 1.2900. The GBP/USD pair trades in a Rising Channel pattern on a daily timeframe, in which each pullback move is considered as a buying opportunity by market participants. The Cable holds the key 20-day Exponential Moving Average (EMA), which trades around 1.2866.
The 14-day Relative Strength Index (RSI) returns within the 40.00-60.00 range, suggesting the bullish momentum has faded. However, the bullish bias remains intact.
On the upside, a two-year high near 1.3140 will be a key resistance zone for the Cable.
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.