- Sterling is expected to remain under pressure after February’s UK Consumer Price Index (CPI) fell short of expectations.
- Weak inflation in the UK has strengthened market expectations that the Bank of England will start cutting interest rates in August.
- The next move for the US dollar will be determined by the Fed’s monetary policy meeting.
Pound Sterling (GBP) turned volatile in London trading on Wednesday after lower-than-expected consumer price index (CPI) data for February released by the UK’s Office for National Statistics (ONS). Annual headline and core inflation rates slowed to 3.4% and 4.5%, respectively. Lower inflation is expected to allow Bank of England (BoE) policymakers to consider cutting interest rates sooner than market participants expected.
Investors should brace for high volatility in Sterling as the central bank is set to announce its second monetary policy decision of 2024 on Thursday. Investors expect the BoE to keep interest rates on hold at 5.25%, but weaker inflation data could lead policymakers to issue slightly more dovish guidance on rates.
Meanwhile, investors continue to maintain a risk-averse attitude ahead of the US Federal Reserve’s policy-setting meeting, which will be announced at 6pm Japan time. With the Fed expected to keep interest rates on hold in the 5.25% to 5.50% range, investors will be keeping an eye on the quarterly updated dot plot and economic forecast. The dot plot shows interest rate forecasts by Fed officials over various time frames.
Daily Digest Market Trends: GBP eyes downside amid multiple headwinds
Sterling is expected to face pressure after Britain’s ONS released softer-than-expected consumer price inflation data for February. The annual headline inflation rate slowed significantly to 3.4%, from 3.6% expected and 4.0% in a preliminary survey. Monthly headline CPI rose 0.6%, recovering from a similar decline seen in January. Investors had expected the monthly headline inflation rate to grow at a strong pace of 0.7%.
The annual core CPI, which subtracts volatile food and energy prices, softened to 4.5% from the expected 4.6% and the previous reading of 5.1%. BoE policymakers generally view core inflation data as the preferred indicator for decision-making on interest rates. A softer reading could increase confidence that inflation will return to the desired 2% on a sustained basis. Bank of England policymakers have repeatedly said it is only appropriate to cut interest rates if they are confident that their inflation target will be met.
The pound is expected to remain volatile as investors focus on the Bank of England’s interest rate decision, which will be announced on Thursday. The Bank of England is expected to keep interest rates unchanged at 5.25% for the fifth consecutive time. Investors will be looking for clues as to when the Bank of England will start cutting interest rates. Investors are now expecting the Bank of England to start cutting interest rates at its August meeting. Moderate inflation data released on Wednesday is likely to strengthen those expectations.
On the other hand, market sentiment remains cautious ahead of the US Federal Reserve’s monetary policy decision. The central bank plans to keep interest rates unchanged at 5.25% to 5.50%, according to the CME FedWatch tool. With interest rates on hold almost completely priced in, all eyes will be on the monetary policy statement, Fed Chairman Jerome Powell’s press conference, the dot plot, and the economic outlook.
Technical analysis: GBP struggles to break above 20-EMA
GBP finds tentative support near the breakout area of the descending triangle formed around 1.2700. Short-term demand for the GBP/USD pair remains uncertain, with the pair struggling to maintain its 20-day exponential moving average (EMA) trading near 1.2730.
On the downside, the descending boundary of the Descending Triangle chart pattern acts as support for GBP. On the upside, a 7-month high around 1.2900 will be a big barrier for cable.
The 14-period Relative Strength Index (RSI) has returned to the 40.00-60.00 range, indicating a sharp reduction in volatility.
Frequently asked questions about the British pound
Pound Sterling (GBP) is the world’s oldest currency (886 AD) and is the official currency of the United Kingdom. According to 2022 data, foreign exchange (FX) trade volume is the fourth largest in the world, accounting for 12% of all trades and an average of $630 billion per day. Its main trading pairs are GBP/USD (also known as “cable”), which accounts for 11% of FX, GBP/JPY (3%), known as the “dragon” among traders, and EUR/GBP (2%). . Sterling is issued by the Bank of England (BoE).
The single most important factor influencing the value of the British pound is monetary policy, determined by the Bank of England. The Bank of England’s decision will be based on whether it has achieved its main objective of “price stability,” or a stable inflation rate of around 2%. The main tool for achieving this is interest rate adjustment. If inflation is too high, the BoE will try to control it by raising interest rates, making credit more costly for people and businesses. This is generally positive for the pound, as rising 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 that economic growth is slowing. In this scenario, the BOE would consider lowering interest rates to make credit cheaper so companies can borrow more to invest in growth-generating projects.
The data release measures the health of the economy and could impact the value of the pound. Indicators such as GDP, manufacturing and services PMI, and employment can all influence the direction of GBP. A strong economy is good for the pound. As well as attracting more overseas investment, that could prompt the BoE to raise interest rates, which could directly lead to a stronger pound. Otherwise, if economic indicators are weak, the pound may weaken.
Another important piece of data about the British pound is its trade balance. This indicator measures the difference between what a country earns from exports and what it spends on imports over a given period of time. If a country produces highly sought-after export goods, its currency will benefit purely from the additional demand generated from foreign buyers looking to purchase these goods. Therefore, if the net trade balance is positive, the currency strengthens, and vice versa if it is negative.
