Pound Sterling faces selling pressure as UK inflation cools down
- The Pound Sterling comes under pressure against its major peers after the release of a soft UK CPI in March.
- Soft UK inflation and grim employment outlook pave the way for the BoE to cut interest rates in May.
- Investors seek fresh development on deals between the US and its trading partners.
The Pound Sterling (GBP) faces selling pressure against its major peers on Wednesday, except the US Dollar (USD), after the release of the softer-than-expected United Kingdom (UK) Consumer Price Index (CPI) data for March.
The Office for National Statistics (ONS) reported that the headline CPI grew at a moderate pace of 2.6% year-on-year compared to estimates of 2.7% and the February reading of 2.8%. In the same period, the core CPI – which excludes volatile items such as food, energy, alcohol, and tobacco – rose by 3.4%, as expected, slower than the former reading of 3.5%. Month-on-month headline inflation grew by 0.3%, softer than estimates and the prior release of 0.4%.
Inflation in the services sector, which is closely tracked by Bank of England (BoE) officials, decelerated to 4.7% on year from the prior release of 5%. Cooling UK inflationary pressures are expected to boost market expectations that the BoE will cut interest rates in the May monetary policy meeting.
Additionally, the grim UK labor market outlook, with an increase in employers’ contributions to social security schemes becoming effective this month, would also force BoE policymakers to back monetary policy easing. In the Autumn Budget, UK Chancellor of the Exchequer Rache Reeves raised employers’ contribution to National Insurance (NI) from 13.8% to 15%.
Daily digest market movers: Pound Sterling outperforms US Dollar
- The Pound Sterling advances to near 1.3290 against the US Dollar during European trading hours on Wednesday. The GBP/USD pair continues to perform strongly as the US Dollar (USD) underperforms across the board, with investors becoming increasingly confident that the economic policies of United States (US) President Donald Trump would lead the economy to a recession. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, tumbles to near 99.50 after a short-lived recovery move to 100.00 on Tuesday.
- In spite of the fact that US President Trump has declared a 90-day pause on the execution of reciprocal tariffs for all of its trading partners, except China, which he announced on so-called “Liberation Day”, investors believe that trade war seldom with Asian giant is enough to bring shockwaves to the economy.
- The US economy is unable to offset the demand for Chinese imports immediately, given the insufficient manufacturing facilities and the absence of low-cost competitive advantage. Such a scenario will force US importers to raise prices of substitutes of Chinese goods, which will significantly dent households' purchasing power. Theoretically, lower purchasing power leads to a decline in the overall demand that dampens the economic growth of an economy in a big way, whose two-thirds of the Gross Domestic Product (GDP) growth relies on consumer spending.
- Meanwhile, investors look for announcements from the White House over securing deals with his trading partners. On Tuesday, US Press Secretary Karoline Leavitt said that the Trump administration is discussing trade deals with “more than 15 nations” and that some agreements could be announced "very soon".
- On a trade deal with the UK, US Vice President JD Vance was confident of having a trade agreement with Britain while speaking with UnHerd on Tuesday. Vance said that there is a "good chance" that both nations will secure a trade deal because of the President’s affinity for Britain.
Technical Analysis: Pound Sterling extends winning spree against US Dollar
The Pound Sterling extends its winning streak for the seventh trading day and jumps to near 1.3300 against the US Dollar on Wednesday. The near-term outlook of the pair is upbeat as all short-to-long Exponential Moving Averages (EMAs) are sloping higher.
The 14-day Relative Strength Index (RSI) has shown a V-shape recovery from 40.00 to 68.00, suggesting a strong bullish momentum.
Looking down, the psychological support of 1.3000 will act as a key support zone for the pair. On the upside, the three-year high of 1.3430 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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