- The Pound Sterling remains upbeat against the US Dollar despite hot US core PCE Price Index data.
- US annual inflation grew at a higher pace of 2.7% against the consensus of 2.6%.
- The UK service sector’s upbeat outlook has increased fears of persistent inflation.
The Pound Sterling (GBP) clings to gains near 1.2500 against US Dollar (USD) in Friday’s early American session. The GBP/USD pair holds gains as recent survey data has shown an improved economic outlook for the United Kingdom even though the Bank of England (BoE) is maintaining interest rates higher.
The preliminary PMI report from S&P Global/CIPS for April released on Tuesday showed that activity in the services sector remains robust, pushing overall activity higher despite a lagging Manufacturing PMI. The data also showed that new business inflows in the service sector remain strong.
Higher demand for services tends to boost employment and wages in the sector, contributing to inflation pressures. This could stall progress in inflation easing to the desired rate of 2%. Also, BoE policymakers have remained worried about high service inflation. Currently, the UK annual service inflation is at 6%, higher than what is required to be consistent for bringing down inflation to the 2% target.
A few BoE policymakers see inflation receding sharply in upcoming months but still refrain from providing a concrete time frame for interest-rate cuts. In the press conference after the last monetary policy meeting, BoE Governor Andrew Bailey said market expectations for two or three rate cuts this year are not “unreasonable”.
Daily digest market movers: Pound Sterling trades close to 10-day high of 1.2500
- The Pound Sterling holds strength near a ten-day high at around the psychological figure of 1.2500 against the US Dollar. The US Dollar struggles to outperform the Pound Sterling despite the US core Personal Consumption Expenditures Price Index (PCE) data for March remains hotter-than-expected.
- Annually, the underlying inflation grew at a higher pace of 2.7% from the estimates of 2.6% but remains lower than the former reading of 2.6%. On a monthly basis, the inflation data rose steadily by 0.3%.
- Stubborn inflation data could allow the Fed to maintain a hawkish rhetoric. Fed policymakers have been reiterating that interest-rate cuts are only appropriate when they are convinced that inflation will return sustainably to the 2% target.
- After the underlying inflation data, investors will focus on the Fed’s monetary policy decision, which will be announced on Wednesday. The Fed is widely anticipated to keep interest rates unchanged in the range of 5.25%-5.50%. Investors will keenly focus on the Fed’s guidance for interest rates.
- On Thursday, the US Dollar came under pressure after the preliminary United States Gross Domestic Product (GDP) growth in the first quarter turned out weaker than expected.
- The US Bureau of Economic Analysis (BEA) reported on Thursday that the economy expanded at a slower pace of 1.6% in Q1, below expectations of 2.5% and the prior reading of 3.4%. Despite the data miss, traders maintain strong bets for the Federal Reserve to start reducing interest rates from September or in the fourth quarter as the GDP Price Index was significantly higher. The inflation measure rose to 3.1% from the prior reading of 1.7%.
Technical Analysis: Pound Sterling holds auction 1.2500
The Pound Sterling trades near Thursday’s high at around 1.2500 against the US Dollar. The GBP/USD pair struggles to extend the upside above the 20-day Exponential Moving Average (EMA), which trades around 1.2510.
The 14-period Relative Strength Index (RSI) rebounds above 40.00, suggesting that a bearish momentum might have concluded for now. However, the long-term bearish bias remains intact.
A sustainable move above the psychological resistance of 1.2500 will drive the pair towards the 200-day EMA, which hovers around 1.2550. On the other side, a downside move below Wednesday’s low at around 1.2430 will expose GBP/USD to a five-month low at around 1.2300.
Inflation FAQs
Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.
The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.
Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.
Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it. Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.
