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Pound Sterling corrects slightly as US core PCE inflation takes the spotlight

  • The pound sterling falls to almost 1.3230 against the US dollar as the latter temporarily gains ground.
  • Economists expect annual PCE core inflation to accelerate to 2.7%.
  • Investors will be eagerly awaiting new information on the BoE's interest rate stance from Catherine Mann's speech at 12:15 GMT.

The pound sterling (GBP) fell from a more than two-year high of 1.3266 against the US dollar (USD) in the London session on Wednesday. The GBP/USD pair fell as the US dollar regained some ground. Investors were focused on the key US Personal Consumption Expenditure Price Index (PCE) data for July due out on Friday as it could be the next big catalyst for the pair.

The US dollar index (DXY), which tracks the greenback's value against six other major currencies, is seeing some buying interest after value buying kicked in after hitting a new yearly low of 100.50.

Despite the recent recovery, the near-term outlook for the US dollar remains gloomy as investors expect the Federal Reserve (Fed) to cut interest rates at its September meeting. Traders are currently debating whether the Fed will make a significant rate cut or stick with a small reduction in borrowing costs.

According to the CME FedWatch tool, 30-day federal funds futures price data shows that the probability of a 50 basis point (bp) rate cut in September is 34.5 percent, while the rest prefer a 25 bp cut.

As for core PCE inflation, economists expect the Fed's preferred inflation gauge to have risen at a faster rate year-on-year, rising 2.7 percent from 2.6 percent in June, with the monthly figure growing steadily at a 0.2 percent pace. Signs of sustained inflation would dampen market speculation about a sharp Fed rate cut, while a further decline in price pressures would boost it.

Daily Market Drivers Summary: Pound Sterling to be led by BoE man’s speech

  • The pound sterling is showing a mixed performance against its major counterparts in European trading on Wednesday. The British currency is expected to trade largely sideways as investors look for fresh clues on the Bank of England's (BoE) interest rate path.
  • The BoE cut its key interest rate by 25 basis points to 5% in August, ending two and a half years of restrictive monetary policy. Confidence grew among officials that price pressures would return permanently to the bank's target of 2%.
  • Market participants expect the BoE's rate-cutting path for the rest of the year to be slower than that of other central banks as the United Kingdom (UK) economy appears to be holding up well, according to the preliminary S&P Global/CIPS PMI for August and robust gross domestic product (GDP) growth in the second quarter.
  • For new guidance on interest rates, investors are awaiting a speech by BoE policymaker Catherine Mann, scheduled for 12:15 GMT. Mann was among those policymakers who voted to keep interest rates at 5.25% at the August 1 monetary policy meeting. Investors will be waiting for clues on how much the BoE will cut interest rates this year, as well as an outlook on services inflation and wage pressures.
  • On a political level, British Prime Minister Keir Starmer's commentary on the budget outlook to be announced in October has also boosted sterling's appeal. Starmer said a tight budget was to be expected, saying in particular that “the budget will bring short-term pain but long-term gains”, with the intention of increasing the tax burden on households, particularly those on higher incomes.

Technical Analysis: Pound Sterling holds key support at 1.3200

The Pound Sterling is correcting slightly after hitting a new two-and-a-half-year high of 1.3266 against the US Dollar. The short-term appeal of the GBP/USD pair remains undiminished as it holds the breakout from the Rising Channel chart formation on the weekly time frame. If bullish momentum resumes, the Cable is expected to extend its upside move towards the February 4, 2022 high of 1.3640.

The upsloping 20-week exponential moving average (EMA) at 1.3000 indicates a strong uptrend.

The 14-period Relative Strength Index (RSI) is fluctuating in the bullish range of 60.00-80.00, suggesting strong upside momentum. Nevertheless, it has reached overbought levels at around 70.00, increasing the chances of a corrective pullback. On the downside, the psychological level of 1.3000 will be the crucial support for the sterling bulls.

Frequently asked questions about the pound sterling

The pound sterling (GBP) is the world's oldest currency (886 AD) and the official currency of the United Kingdom. It is the fourth most traded foreign exchange (FX) unit in the world, accounting for 12% of all transactions, representing an average volume of $630 billion per day (2022 data). The main trading pairs are GBP/USD, also known as the “Cable”, which accounts for 11% of FX, GBP/JPY or the “Dragon” as it is called by traders (3%), and EUR/GBP (2%). The pound sterling is issued by the Bank of England (BoE).

The most important factor affecting the value of sterling is the monetary policy of the Bank of England. The BoE bases its decisions on whether it has achieved its main objective of “price stability” – a stable inflation rate of around 2%. Its main tool for achieving this goal is adjusting interest rates. When inflation is too high, the BoE tries to contain it by raising interest rates, making it more expensive for individuals and businesses to borrow. This is generally positive for the GBP, as higher interest rates make the UK a more attractive place for global investors to park their money. When inflation is too low, it is a sign that economic growth is slowing. In this scenario, the BoE will consider cutting interest rates to make borrowing cheaper so that businesses borrow more to invest in growth-enhancing projects.

Data releases measure the health of the economy and can affect the value of sterling. Indicators such as GDP, manufacturing and services purchasing managers' indices, and employment can influence the direction of the GBP. A strong economy is good for the pound. Not only does it attract more foreign investment, but it can also encourage the BoE to raise interest rates, which will directly strengthen the GBP. Otherwise, sterling is likely to fall if economic data is weak.

Another important data release for the pound sterling is the trade balance. This indicator measures the difference between a country's export earnings and import expenditure over a given period. If a country produces export goods that are in high demand, its currency will benefit solely from the additional demand created by foreign buyers wanting to purchase those goods. Therefore, a positive net trade balance strengthens a currency and a negative balance is the opposite.

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