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Pound Sterling hovers near 1.3200, US core PCE inflation in focus

  • Sterling is trading sideways at around 1.3200 against the US dollar, with investors focusing on core US PCE inflation data for July.
  • Mary Daly of the Fed kept open the possibility of aggressive easing of monetary policy if the situation on the US labor market worsens.
  • British retail price inflation slowed significantly in August.

The Pound Sterling (GBP) is holding on to gains near the 1.3200 round mark against the US Dollar (USD) in the London session on Tuesday. The GBP/USD pair is taking a breather, so to speak, after last week's sharp rise as investors look for fresh clues about the likely size of the Federal Reserve's (Fed) interest rate cut in September.

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 28.5%, while the rest prefer a smaller cut of 25 bp. The tool clearly shows that the Fed's return to normalizing its monetary policy is fully priced in by traders, a move that has kept the US dollar on the defensive for more than a week.

The US dollar index (DXY), which tracks the greenback's value against six major currencies, is showing a subdued performance below immediate resistance at 101.00.

On Monday, San Francisco Fed President Mary Daly stressed the need for a rate cut in September. Daly supports a 25 basis point rate cut, but also left open the possibility of a larger cut if the labor market worsens, she said in an interview with Bloomberg.

Investor confidence that the Fed will begin cutting interest rates in September has increased after Fed Chairman Jerome Powell said it was time to adjust policy in his speech at the Jackson Hole (JH) Symposium on Friday. Jerome Powell also expressed concern about easing labor market conditions and promised to support them.

This week, investors will be particularly focused on the US Personal Consumption Expenditure Price Index (PCE) data for July, which will be released on Friday. Annual core PCE is expected to have accelerated to 2.7% from 2.6% (last released), with monthly figures expected to grow steadily by 0.2%. Before that, the US economic calendar offers the release of the S&P/Case-Shiller home price indices for June and the Conference Board consumer confidence index for August on Tuesday.

Daily overview of market drivers: Pound Sterling outperforms major competitors

  • The pound sterling is showing strength against its major counterparts (excluding Asia-Pacific currencies) on Tuesday. The British currency is benefiting from positive market sentiment and the improving economic outlook in the United Kingdom (UK). The economic outlook improved after the preliminary S&P Global/CIPS PMI showed that activity in both the manufacturing and services sectors rose faster than expected in August.
  • Declining speculation that the Bank of England (BoE) will cut interest rates again in September has also increased the pound's appeal. The likelihood of this scenario is low, as BoE officials expect inflation to rise again, although planned price pressures appear to be easing.
  • UK shop prices fell in August for the first time since October 2021, data from the British Retail Consortium (BRC) showed on Tuesday. Non-food prices fell 1.5%, the biggest drop in three years, due to falling sales of summer clothing. Food prices rose at a slower pace, by 2.0%, the smallest increase since November 2021, after a 2.3% rise in July.
  • A slowdown in retail price inflation is unlikely to increase expectations for BoE rate cuts in September, as officials remain concerned about ongoing price pressures in the services sector due to wage pressures. However, it could fuel speculation of another rate cut before the end of the year.

Technical Analysis: Pound Sterling consolidates at 1.3200

The pound sterling is turning sideways after hitting a fresh two-and-a-half-year high of 1.3200 against the US dollar. The GBP/USD pair gained after breaking out of the Rising Channel chart formation on the weekly time frame. If bullish momentum resumes, the Cable is expected to extend its uptrend towards the February 4, 2022 high of 1.3640.

The upsloping 20-week exponential moving average (EMA) at 1.2766 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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