- In the face of the UK’s inflation statistics, the pound sterling is holding steady against the US dollar, above 1.2700.
- UK inflation is expected to fall sharply in April.
- Fed officials continue to support higher long-term interest rates.
The British pound (GBP) is showing firm momentum, trading just above 1.2700 in European trading on Tuesday. The next move for the GBP/USD pair is likely to be guided by April UK Consumer Price Index (CPI) data and May Federal Open Market Committee (FOMC) minutes to be released on Wednesday.
The U.S. Dollar Index (DXY), which tracks the value of the U.S. dollar against six major currencies, is steady near 104.60 as investors look for new clues about when the Federal Reserve will start cutting interest rates. Investors are awaiting the FOMC minutes to get a deeper understanding of policy makers’ views on the interest rate outlook.
The U.S. inflation outlook has changed significantly since the last Fed meeting, so the FOMC minutes may have a modest impact on markets. Inflation fell as expected in April, signaling a resumption of progress in the inflation-control process that had failed in the first quarter. The last Fed meeting was held before the latest inflation report was released, so expect Fed officials to be quite hawkish in their communication on interest rates.
Despite the decline in U.S. inflation in April, Fed officials appear to still lack confidence that price pressures will sustainably return to their 2% target rate. “Inflation in the first quarter was disappointing and did not provide the confidence needed to ease monetary policy,” Michael Barr, the Fed’s vice chairman for oversight, said on Monday. Barr vowed to give the tightening policy stance more time to do its job.
Daily Digest Market Trends: GBP rises despite US dollar stability
- Sterling is up slightly, but remains within Monday’s trading range and maintains key support at 1.2700 against the US dollar. Sterling remains firm against all major currencies ahead of April UK CPI data.
- Economists expect the headline inflation rate announced by the UK’s Office for National Statistics (ONS) to drop significantly to 2.1% from the previous 3.2%. Core CPI, which excludes more volatile items, is estimated to have slowed to 3.6% from 4.2% in March. Monthly headline inflation is expected to rise at a slower pace of 0.2%, after a strong 0.6% rise in March.
- UK inflation is expected to fall, giving investors more confidence that price pressures are on track to return to the desired 2% level. This will likely increase expectations for an early rate cut by the Bank of England. Investors are currently divided over whether the central bank will start returning to policy normalization at its June or August meeting.
- Dovish comments from Ben Broadbent, Deputy Governor of the Bank of England, on the outlook for interest rates have fueled expectations that the BoE will start cutting interest rates in the summer. “If the situation continues to develop in line with our outlook, which suggests that policy restrictions will need to be eased at some point, then we will continue to do so by the end of the summer,” Broadbent said on Monday, Reuters reported. There is a possibility that bank interest rates will be lowered in the near future.”
Technical analysis: GBP trades above 1.2700
The British pound extended its winning spell into the third session on Tuesday, but prices were flat in Monday’s trading session, suggesting investors are waiting for a new impetus for further action. GBP/USD rose to a nearly two-month high near 1.2700. Cable is expected to maintain its bullish trajectory as all exponential moving averages (EMAs), from short-term to long-term, are trending upwards, suggesting a strong uptrend. Cable has recouped 61.8% of its losses from its March high near 1.2900.
The 14-period Relative Strength Index (RSI) has moved into a bullish range of 60.00 to 80.00, suggesting momentum is trending upward.
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, as 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.
