- The Pound Sterling is down slightly against the US Dollar ahead of the US core PCE inflation data.
- US PCE inflation is expected to have steadied in April.
- UK business optimism improves due to cooling inflationary pressures and expectations for BoE rate cuts.
The Pound Sterling (GBP) comes under pressure in Friday’s early London session as the sharp recovery move from a four-day low near 1.2680 appears to have lost momentum. The GBP/USD treads cautiously amid uncertainty ahead of the publication of the United States core Personal Consumption Expenditure Price Index (PCE) data for April, which will be released at 12:30 GMT.
The core PCE inflation data, which is the Federal Reserve’s (Fed) preferred inflation measure, is estimated to have grown steadily by 0.3% and 2.8% on monthly and annual basis, respectively. Investors will keenly focus on this report as it could provide significant cues about the Fed’s rate-cut path.
The scenario of core PCE data coming in line with expectations is less likely to move the Fed towards rate cuts in September as Fed policymakers have said they want to see inflation declining for months before considering a policy-normalization move. A hotter-than-expected inflation reading would significantly impact market speculation for the Fed reducing interest rates by delaying the move towards November, while soft figures would boost prospects of the Fed lowering key borrowing rates from September.
Daily digest market movers: Pound Sterling drops amid uncertain market sentiment
- The Pound Sterling edges down to 1.2720 against the US Dollar (USD). The Cable struggles to extend recovery as the US Dollar stabilizes after a steep correction induced by the downwardly revised US Q1 Gross Domestic Product (GDP) data on Thursday. The US Bureau of Economic Analysis (BEA) reported that the economy expanded at a slower pace of 1.3% due to lower consumer spending compared with the preliminary estimate of 1.6%.
- Downwardly revised GDP estimates weighed on the US Dollar, and market speculation about the Fed lowering interest rates in September edged up slightly above 50%. Fed rate-cut prospects will be meaningfully influenced by the core PCE inflation data.
- Meanwhile, Fed policymakers continue to emphasize keeping interest rates at their current levels until they get sufficient evidence that inflation will sustainably return to the desired rate of 2%. On Thursday, Dallas Federal Reserve Bank President Lorie Logan said inflation is on course to return to 2% but the path appears to be slower and bumpier than expected at the beginning of the year, Reuters reports. Logan also said it is too early to consider rate cuts.
- On the United Kingdom (UK) front, the outlook for the economy has improved after a survey by Lloyds Bank showed that easing price pressures and firm expectations for the Bank of England (BoE) starting to reduce interest rates sooner have pushed business optimism to its highest since November 2015.
- Due to the absence of top-tier UK economic data, investors look for developments in upcoming elections. Exit polls show that the Labour Party will come into power after almost 15 years of conservative-led governments.
- The Pound Sterling could remain slightly volatile due to market expectations for elections but its impact on the monetary policy is expected to be slim. The outlook for the UK economy could change if the Labour Party comes into power, but their fiscal plans are expected to remain conservative to avoid any upside risk to price pressures.
Technical Analysis: Pound Sterling holds 1.2700
The Pound Sterling exhibits a subdued performance against the US Dollar ahead of the US core PCE Price Index data for April. The near-term outlook of the GBP/USD pair remains upbeat as it holds above at 1.2670, the 61.8% Fibonacci retracement support (plotted from the March 8 high of 1.2900 to the April 22 low at 1.2300).
The Cable is expected to remain in the bullish trajectory as all short-to-long-term Exponential Moving Averages (EMAs) are sloping higher, suggesting a strong uptrend.
The 14-period Relative Strength Index (RSI) has slipped into the 40.00-60.00 range, suggesting that the momentum, which was leaned toward the upside has faded for now.
(This story was corrected on May 31 at 06:32 GMT to say that the core PCE Price Index is the Federal Reserve’s preferred inflation measure, not tool.)
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, aka ‘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.
