Pound Sterling holds onto gains against US Dollar ahead of US CPI
- The Pound Sterling stays strong near Tuesday’s high of 1.2450 against the US Dollar ahead of the US CPI data for January.
- Fed’s Powell stated that the central bank is in no rush to cut interest rates.
- The UK economy is expected to have contracted by 0.1% in the last quarter of 2024.
The Pound Sterling (GBP) clings to gains near 1.2450 against the US Dollar (USD) in Wednesday’s European session. The GBP/USD pair exhibits strength ahead of the United States (US) Consumer Price Index (CPI) data for January, which will be published at 13:30 GMT.
Economists expect the annual core CPI – which excludes volatile food and energy prices – to have grown at a slower pace of 3.1%, compared to a 3.2% increase in December. In the same period, the headline CPI inflation is estimated to have remained steady at 2.9%. The month-on-month headline and core CPI are expected to have risen by 0.3%.
Market participants will pay close attention to US inflation data, which will influence speculation about how long the Federal Reserve (Fed) will keep interest rates steady in the range of 4.25%-4.50%.
Fed Chair Jerome Powell said on the first day of his two-day testimony before the US Congress on Tuesday that the central bank is in “no hurry to cut interest rates”, given resilient economic growth and sticky inflationary pressures. Powell argued that reducing policy restraint “too fast or too much” could “hinder progress on inflation”.
Ahead of the US inflation data, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, trades slightly higher near 108.00.
Daily digest market movers: Pound Sterling gains despite growing concerns over UK demand outlook
- The Pound Sterling trades higher against its major peers on Wednesday. However, the outlook of the British economy is uncertain as Bank of England (BoE) Monetary Policy Committee (MPC) member Catherine Mann is worried about the United Kingdom (UK) demand outlook and sees the need to accommodate financial conditions.
- On Tuesday, Catherine Mann said in an interview with the Financial Times (FT) that demand conditions are quite a bit “weaker than has been the case”. Mann favored a bigger interest rate reduction in last week’s policy meeting in which the BoE unanimously decided to cut interest rates by 25 basis points (bps). Investors were surprised by Mann’s vote for a 50 bps interest rate cut as she has been an outspoken hawk. On it, Mann clarified in the interview that she wanted to communicate to traders “what we think are the appropriate financial conditions for the UK economy”.
- Meanwhile, US President Donald Trump’s international agenda will continue to keep investors in risk-sensitive assets on their toes. Donald Trump is poised to announce reciprocal tariffs after signing executive orders imposing a 25% levy on steel and aluminum imports into the US without exemptions or exclusions.
- Going forward, investors will focus on the United Kingdom's Q4 and December month Gross Domestic Product (GDP) data, which will be released on Thursday. The UK economy is expected to have contracted by 0.1% quarter-on-quarter after remaining flat in the third quarter of 2024. On year, the economy is estimated to have expanded by 1.1% compared to the same quarter of 2023, faster than the 0.9% growth in the July-September period.
Technical Analysis: Pound Sterling stays firm near 1.2450
The Pound Sterling trades near Tuesday’s high around 1.2450 against the US Dollar in the European session on Wednesday. However, the outlook of the GBP/USD pair remains bearish as the 50-day Exponential Moving Average (EMA) around 1.2484 continues to be a major barrier for the Pound Sterling bulls.
The 14-day Relative Strength Index (RSI) oscillates inside the 40.00-60.00 range, suggesting a sideways trend.
Looking down, the January 13 low of 1.2100 and the October 2023 low of 1.2050 will act as key support zones for the pair. On the upside, the December 30 high of 1.2607 will act as key resistance.
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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