Pound Sterling trades in tight range against US Dollar ahead of US inflation data
- The Pound Sterling trades sideways near 1.2750 against the USD as investors await the US inflation data for November.
- The impact of US inflation should be limited on Fed interest rate prospects unless there is a dramatic deviation from expectations.
- Investors expect the BoE to leave interest rates steady at 4.75% on December 19.
The Pound Sterling (GBP) consolidates in a tight range near 1.2750 against the US Dollar (USD) in Tuesday’s European session. The GBP/USD pair trades sideways as investors focus on the United States (US) Consumer Price Index (CPI) data for November, which will be published on Wednesday.
Economists expect the annual headline inflation to have accelerated to 2.7% from the October reading of 2.6%. In the same period, the core CPI – which excludes volatile food and energy prices – is expected to have risen steadily by 3.3%. The month-on-month headline and core CPI are estimated to have grown steadily by 0.2% and 0.3%, respectively.
Unless there is a dramatic deviation from what’s expected, the impact of the inflation data shouldn’t significantly change market expectations for the Federal Reserve’s (Fed) likely interest rate action in the policy meeting on December 18. Recent commentaries from a string of Fed officials have indicated that they are confident about inflation remaining on a sustainable path towards the bank’s target of 2%.
However, Fed Governor Michelle Bowman, a well-known hawk, said on Friday that the central bank should “proceed cautiously and gradually in lowering the policy rate, as inflation remains elevated.”
There is an almost 90% chance that the Fed will reduce interest rates by 25 basis points (bps) to 4.25%-4.50%, according to the CME FedWatch tool.
In Tuesday’s session, investors will focus on the Q3 Unit Labor Costs data, which will be published at 13:30 GMT. The economic data will indicate the total cost borne by employers for employing the labor force. The Unit Labor Cost data is estimated to have grown steadily by 1.9% compared to the previous quarter.
Daily digest market movers: Pound Sterling gains as BoE is set to leave interest rates steady next week
- The Pound Sterling performs strongly against its major peers on Tuesday in a light United Kingdom (UK) economic calendar week, with investors becoming increasingly confident that the Bank of England (BoE) will leave interest rates unchanged at 4.75% in the monetary policy meeting on December 19.
- The majority of BoE officials are expected to vote for an unchanged interest rate decision as the UK headline inflation has ticked up again after declining below the bank’s target of 2%. The BoE had already projected that inflation would pick up after coming within the bank’s desired range, suggesting that the central bank needs to do more to bring inflation down sustainably.
- Later this week, investors will focus on the UK monthly Gross Domestic Product (GDP), and Industrial and Manufacturing Production data for October. The GDP and factory data will show the current status of economic health. Economists expect the factory and GDP data to have expanded after declining in September.
Technical Analysis: Pound Sterling aims to reclaim 1.2800
The Pound Sterling strives to reclaim the key resistance of 1.2800 against the US Dollar. The GBP/USD pair holds the 20-day Exponential Moving Average (EMA) around 1.2720.
The 14-day Relative Strength Index (RSI) oscillates in the 40.00-60.00 range, suggesting a sideways trend.
Looking down, the pair is expected to find a cushion near the upward-sloping trendline around 1.2500, which is plotted from the October 2023 low near 1.2035. On the upside, the 200-day EMA around 1.2830 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.