Pound Sterling corrects ahead of US PCE inflation data
- The Pound Sterling retreats to near 1.3500 against the US Dollar, ahead of key US PCE inflation data for July.
- Fed’s Waller stated that he will support interest rate cuts in the policy meeting in September.
- The British currency underperformed its peers this week.
The Pound Sterling (GBP) corrects to near 1.3500 against the US Dollar (USD) during the European trading session on Friday. The GBP/USD pair retreats after a three-day winning streak as the US Dollar trades marginally higher ahead of the United States (US) Personal Consumption Expenditure Price Index (PCE) data for July, which will be published at 12:30 GMT.
At the time of writing, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, ticks up to near 98.00.
Economists expect the US core PCE inflation, which is the Federal Reserve’s (Fed) preferred inflation gauge, to have risen at a faster pace of 2.9% on year against 2.8% in June, with the monthly figure rising steadily by 0.3%.
Majorly, the PCE inflation remains a key driver for market expectations for the Federal Reserve’s (Fed) monetary policy outlook. However, its impact is expected to be limited this time as rate-setting members have become more concerned about growing labor market, which stemmed after a sharp downward revision in Nonfarm Payrolls (NFP) data for May and June.
On Thursday, Fed Governor Christopher Waller also warned of downside labor market risks, while stating that he will support a 25-basis point (bps) interest rate cut in the September policy meeting. “While there are signs of a weakening labor market, I worry that conditions could deteriorate further and quite rapidly,” Waller said, Reuters reported.
Daily digest market movers: Pound Sterling underperforms its peers this week
- The Pound Sterling underperforms its peers on Friday amid a light United Kingdom (UK) economic calendar week. The British currency remains lower even as market experts believe the Bank of England (BoE) will not cut interest rates for the remainder of the year.
- This week, BoE Monetary Policy Committee (MPC) member Catherine Mann also argued in favor of holding interest rates at their current levels for a longer period, with inflationary pressures turning out to be persistent.
- "A more persistent hold on Bank Rate is appropriate right now, to maintain the tight-but-not-tighter monetary policy stance needed to lean against inflation persistence persisting," Mann said, Reuters reported.
- Going forward, the major trigger for the Pound Sterling will be the United Kingdom (UK) Retail Sales data for July, which will be published next week. Economists expect the Retail Sales data, a key measure of consumer spending, to have grown at a moderate pace.
- Meanwhile, growing doubts over the dominance of the US Dollar are expected to provide support to the GBP/USD pair. Financial market participants have become concerned over the safe-haven appeal of the US Dollar due to continuous attacks by US President Donald Trump to the Fed’s independence.
- This week, US President Trump released the termination letter of Fed Governor Lisa Cook over mortgage allegations. In response, Cook has filed a lawsuit, citing them as baseless, to keep her job, and the hearing on the motion is scheduled for 14:00 GMT on Friday.
- In past, US President Trump has attacked the Fed’s independence several times by threatening Chair Jerome Powell that he will lose his job if he does not lower interest rates. However, Trump praised Powell after his speech at the Jackson Hole Symposium on Friday, in which he surprisingly delivered a dovish interest rate guidance.
Technical Analysis: Pound Sterling sticks to 20-day EMA
The Pound Sterling falls slightly to near 1.3500 against the US Dollar on Friday. The overall trend of the GBP/USD pair remains sideways as it stays close to the 20-day Exponential Moving Average (EMA), which trades around 1.3468.
The Cable is also forming an inverse Head and Shoulder (H&S) chart pattern on the daily chart, which leads to a bullish reversal after a corrective or downside move. The neckline of the H&S pattern is placed around 1.3580.
The 14-day Relative Strength Index (RSI) oscillates inside the 40.00-60.00 range, suggesting a sharp volatility contraction.
Looking down, the August 11 low of 1.3400 will act as a key support zone. On the upside, the July 1 high near 1.3790 will act as a key barrier.
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.