Pound Sterling holds onto gains against US Dollar ahead of US inflation data
- The Pound Sterling trades firmly against the US Dollar around 1.2900 ahead of the US inflation data for February.
- Fed dovish bets have accelerated on US President Trump's tariffs-led slowdown fears.
- BoE officials support a “gradual and cautious” interest rate cut approach.
The Pound Sterling (GBP) turns sideways after a strong rally in over a month around 1.2900 against the US Dollar (USD) in European trading hours on Tuesday. The GBP/USD pair trades firmly as the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, struggles above the four-month low of 103.45 ahead of the United States (US) Consumer Price Index (CPI) data for February, which will be released on Wednesday.
Investors will pay close attention to the US inflation data as it will influence market speculation over the Federal Reserve’s (Fed) monetary policy outlook. Year-on-year headline inflation is estimated to have grown by 2.9%, slower than 3% in January. In the same period, the core CPI – which excludes volatile food and energy prices – is expected to have decelerated to 3.2% from the prior release of 3.3%.
Lately, traders have raised bets supporting the Fed to start reducing interest rates in May amid fears of US President Donald Trump's tariff agenda-led slowdown. According to the CME FedWatch tool, the likelihood for the Fed to cut interest rates in May has increased to 51% from 37% a day ago.
However, a slew of Fed officials, including Chair Jerome Powell, has been guiding a “wait and see” approach amid a lack of clarity on President Donald Trump’s tariff and taxation policies. On Friday, Jerome Powell said, “Uncertainty around Trump administration policies and their economic effects remains high, and the net effect of trade, immigration, fiscal, and regulation policy is what matters for the economy and the monetary policy.”
In Tuesday’s session, investors will focus on the US JOLTS Job Openings data for January, which will be published at 14:00 GMT. US employers are expected to have posted 7.75 million new jobs, slightly higher than the 7.6 million seen in December.
Daily digest market movers: Pound Sterling ticks higher against its peers
- The Pound Sterling trades higher against its major peers on Tuesday as traders become increasingly confident that the Bank of England (BoE) will keep interest rates at their current levels for longer. Traders are confident about the BoE maintaining a restrictive monetary policy stance for longer amid strong wage growth in the United Kingdom (UK), which fuels inflation in the services sector.
- Last week, four BoE policymakers, including Governor Andrew Bailey, guided before the Parliamentary Treasury Committee a gradual path for “unwinding monetary policy restrictiveness” as the inflation persistence is less likely to fade “on its own accord.”
- On the contrary, BoE Monetary Policy Committee (MPC) Catherine Mann argues in favor of a swift monetary expansion approach due to “substantial volatility” coming from financial markets, especially from “cross-border spillovers”.
- This week, investors will focus on the UK monthly Gross Domestic Product (GDP) and the factory data for January, which will be released on Friday. The UK economy is estimated to have grown at a moderate pace of 0.1%, compared to 0.4% in December.
Technical Analysis: Pound Sterling sees more upside above 61.8% Fibo retracement at 1.2930
The Pound Sterling gathers strength to break above the 61.8% Fibonacci retracement plotted from the late September high to mid-January low around 1.2930 on Tuesday. The long-term outlook of the GBP/USD pair has turned bullish as it holds above the 200-day Exponential Moving Average (EMA), which is around 1.2692.
The 14-day Relative Strength Index (RSI) holds above 60.00, suggesting a strong bullish momentum.
Looking down, the 50% Fibo retracement at 1.2767 and the 38.2% Fibo retracement at 1.2608 will act as key support zones for the pair. On the upside, the psychological 1.3000 level will act as a key resistance zone.
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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