- The Pound Sterling trades below 1.3000 against the US Dollar as slowing UK inflation fuels BoE’s dovish bets.
- UK service inflation slowed to 4.9%, the lowest level since May 2022.
- Growing speculation of a Trump victory in the US presidential elections has strengthened the US Dollar.
The Pound Sterling (GBP) strives to gain ground against its major peers on Thursday after facing an intense sell-off on Wednesday. The British currency slumped after the release of the United Kingdom (UK) Consumer Price Index (CPI) data for September, which showed that inflation grew at a slower-than-expected pace.
Annual headline inflation decelerated to 1.7%, below the Bank of England’s (BoE) target of 2%. The core CPI – which excludes a few of the more volatile items – rose by 3.2%, also lower than expected. UK’s service inflation, a closely watched indicator by BoE officials for decision-making on interest rates, decelerated to 4.9%.
Plunging inflationary pressures have bolstered BoE dovish bets. Traders are pricing in a 25 basis points (bps) interest rate cut in each of the two policy meetings that remain for the year. Before the inflation data release, market participants were anticipating the BoE to cut its key borrowing rates only once, either in November or December.
British Finance Minister Rachel Reeves welcomed the sharp drop in inflation ahead of her first budget, which she will present on October 30. A sharp decline in price pressures should allow Reeves to spend more money on development.
On the economic front, the next important data point in the UK is Retail Sales data for September, which will be published on Friday. The Retail Sales data, a key measure of consumer spending, is estimated to have declined 0.3% after gaining 1.1% in August on month-on-month. On an annual basis, the consumer spending measure is expected to have grown by 3.2%, higher than 2.5% in August.
Daily digest market movers: Pound Sterling remains vulnerable against US Dollar
- The Pound Sterling bears take a breath after sliding to near 1.2970 against the US Dollar in Thursday’s London session. However, the outlook of the GBP/USD pair remains vulnerable as the US Dollar rises further as traders have priced out Federal Reserve’s (Fed) large rate cut bets in November.
- The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, posts a fresh over 10-week high near 103.60. Market participants don’t expect the Fed to continue with hefty rate cuts as the recent United States (US) labor market data for September showed that the labor market remains quite resilient.
- According to the CME FedWatch tool, 30-day Federal Funds futures pricing data shows that markets broadly expect the central bank will cut interest rates by 25 basis points (bps) in both policy meetings in November and December.
- Meanwhile, rising expectations for former US President Donald Trump winning the US presidential elections, scheduled for November 5, has strengthened the US Dollar. Investors expect a Trump administration to provide looser financial conditions, higher import tariffs, and tax cuts.
- In Thursday’s US session, investors will pay close attention to the monthly US Retail Sales data for September, a key measure of consumer spending, to be published at 12:30 GMT. Economists expect the Retail Sales to have grown by 0.3%.
Technical Analysis: Pound Sterling trades below 1.3000
The Pound Sterling shifts below the psychological figure of 1.3000 against the US Dollar in the London trading hours. The GBP/USD pair weakened after breaking below the four-day trading range, extending between 1.3020 and 1.3100. The Cable was already under pressure after slipping below the upward-sloping trendline plotted from the 28 December 2023 high of 1.2827 earlier in October.
The near-term trend of the major looks vulnerable as the 20- and 50-day Exponential Moving Averages (EMAs) near 1.3135 and 1.3100, respectively, are sloping downwards.
The recent downside move in the Relative Strength Index (RSI) below 40.00 also suggests a bearish momentum is picking up.
Looking down, the 200-day EMA near 1.2840 will be a major support zone for Pound Sterling bulls. On the upside, the Cable will face resistance near the round-level figure of 1.3100.
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.
Source: https://www.fxstreet.com/news/pound-sterling-faces-pressure-as-chances-of-boe-rate-cuts-soar-202410170912