Pound Sterling consolidates against USD ahead of US core PCE inflation
- The Pound Sterling trades sideways against the US Dollar above 1.2400 as investors focus on the US PCE inflation data for December.
- President Trump’s tariff threats on BRICS and its North American peers have increased USD’s safe-haven appeal.
- Investors expect the BoE to resume the interest rate-cut cycle on Thursday.
The Pound Sterling (GBP) trades in a tight range slightly above the key support of 1.2400 against the US Dollar (USD) in Friday’s European session. The GBP/USD pair steadies despite an increase in the US Dollar’s safe-haven demand on Thursday after United States (US) President Donald Trump reiterated his intentions to impose 25% tariffs on Canada and Mexico from Saturday and 100% on BRICS if they try to replace the US Dollar with a new currency in international trade.
The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, trades close to its weekly high of 108.20.
On his social media platform, TruthSocial, Trump said, "We are going to require a commitment from these seemingly hostile countries that they will neither create a new BRICS currency nor back any other currency to replace the mighty US Dollar, or they will face 100% tariffs." He added that there is no chance that “BRICS will replace the US Dollar in International trade” or anywhere else, and any country that tries should say, “Hello to Tariffs, and goodbye to America!"
Market participants believe that President Trump's higher tariffs would be inflationary for the US economy, which could force the Federal Reserve (Fed) to keep interest rates at their current levels for longer. On Wednesday, the Fed announced a pause in the easing policy cycle and kept borrowing rates unchanged in the range of 4.25%-4.50%.
Fed Chair Jerome Powell said that monetary policy adjustments will become appropriate when central bank officials see “real progress on inflation or at least some weakness in the labor market.”
In Friday’s session, investors will pay close attention to the US Personal Consumption Expenditures Price Index (PCE) data for December, which will be published at 13:30 GMT. The core PCE inflation, the Fed’s preferred inflation gauge, is estimated to have grown at a faster pace of 0.2% month-on-month from 0.1% in November, with annual figures growing steadily by 2.8%.
Daily digest market movers: Pound Sterling ticks lower against major peers
- The Pound Sterling is under pressure against its major peers on Friday, with investors focusing on the Bank of England’s (BoE) monetary policy decision next Thursday. Traders are confident that the BoE will resume the policy-easing cycle and reduce interest rates by 25 basis points (bps) to 4.5%.
- The BoE’s monetary policy guidance could be dovish, as recent inflation indicators have shown signs of deceleration, although wage growth remains accelerating.
- Financial market participants are pricing in three interest rate cuts from the BoE this year amid faltering labor demand and weakening business confidence. This is due to higher employer contributions to National Insurance (NI) announced by Chancellor of the Exchequer Rachel Reeves in the Autumn budget.
- However, Reeves strives to cool dissatisfaction among business owners by adopting significant measures to boost growth. In her speech at Oxfordshire on Wednesday, Reeves vowed to support the expansion of London's Heathrow Airport and to remove "stifling and unpredictable" regulations to boost productivity. She was also confident about building better trade relations with the US under Donald Trump's leadership.
Technical Analysis: Pound Sterling holds above 1.2400
The Pound Sterling has held the key support of 1.2400 against the US Dollar since Monday. The near-term outlook for the GBP/USD pair remains firm as it holds the 20-day Exponential Moving Average (EMA), which trades around 1.2400. However, the 50-day EMA near 1.2510 remains a major barrier for the Sterling bulls.
The 14-day Relative Strength Index (RSI) oscillates in the 20.00-40.00 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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