Market Data 
- The Pound Sterling clings to gains near 1.3400 against the US Dollar as the latter weakens after soft inflation data.
- A slight acceleration in the US core PCE inflation suggests that the Fed’s battle against inflation is not over yet.
- Investors await Fed Powell and BoE Greene’s speech.
The Pound Sterling (GBP) continues to hold gains near the round-level resistance of 1.3400 against the US Dollar (USD) in Monday’s London session. The outlook for the GBP/USD pair remains firm as the Greenback trades near yearly lows after data released on Friday showed that US inflation decelerated further in August. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, hovers near the key support of 100.20.
The Personal Consumption Expenditure Price Index (PCE) report showed that the annual inflation grew by 2.2%, slower than estimates of 2.3% and July’s reading of 2.5%. This slowdown in price pressures is likely welcome news for Federal Reserve (Fed) Chair Jerome Powell and his colleagues. However, a victory over inflation is still not a given as the core PCE price index – which excludes volatile food and energy prices and is the Federal Reserve’s (Fed) preferred inflation measure – rose accelerated to 2.7% from the prior release of 2.6%.
The decline in US inflation has increased market expectations for more interest rate cuts, but it appears insufficient to cement another 50 basis points (bps) decline as the Fed is now more vigilant to growing labor market risks and an economic slowdown.
This week, investors will focus on a slew of US economic data such as the ISM Manufacturing and Services PMIs, ADP Employment, and Nonfarm Payrolls (NFP) data for September and JOLTS Job Openings data for August, which will provide fresh cues on the current health of job market and the economy.
In Monday’s session, investors will pay attention to Jerome Powell’s speech at 17:00 GMT, who is expected to provide fresh interest rate guidance. Powell’s commentary could indicate whether the Fed will cut interest rates again by a larger-than-usual cut of 50 bps, as it did on September 18, or will shift to a gradual reduction of 25 bps.
Daily digest market movers: Pound Sterling underperforms against Asia-Pacific peers
- The Pound Sterling exhibits strength against its major peers, except Asia-Pacific currencies, at the start of the week. The British currency gains as investors expect that the pace and the depth of interest rate cuts by the Bank of England (BoE) to be lower than that of other central banks from Group of Seven (G-7) nations.
- Asia-Pacific currencies, such as the Australian Dollar (AUD) and the New Zealand Dollar (NZD), perform strongly after China’s cabinet announced on Sunday that they will focus on solving outstanding economic problems and strive to complete annual economic and social development goals, Reuters reported. The likelihood of an improvement in China’s economic prospects improves the appeal of Asia-Pacific currencies given that their nations are major trading partners of China.
- Financial market participants expect the BoE to cut interest rates one more time by 25 bps in one of the remaining two meetings this year. For fresh cues, investors will focus on BoE Megan Greene’s speech at 20:10 GMT, who is an external member of the nine-member-led Monetary Policy Committee (MPC). Greene voted to leave interest rates unchanged in the monetary policy meetings on September 19 and August 1.
- On the economic front, revised estimates of Q2 Gross Domestic Product (GDP) showed that the United Kingdom (UK) economy grew by 0.5%, slower than the flash reading of 0.6% on a quarterly basis. The annual Q2 GDP growth also came in lower at 0.7% from the preliminary estimate of 0.9%.
Technical Analysis: Pound Sterling turns sideways near 1.3400
The Pound Sterling consolidates near the key resistance of 1.3400 against the US Dollar in European trading hours. The near-term outlook of the GBP/USD pair remains firm as the 20-day Exponential Moving Average (EMA) near 1.3250 is sloping higher.
Earlier in September, the Cable strengthened after recovering from a corrective move to near the trendline plotted from the December 28, 2023, high of 1.2828, from where it delivered a sharp increase after a breakout on August 21.
The 14-day Relative Strength Index (RSI) remains above 60.00, suggesting an active bullish momentum.
Looking up, the Cable will face resistance near the psychological level of 1.3500. On the downside, the 20-day EMA near 1.3235 will be the key support for Pound Sterling bulls.
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.
