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Pound Sterling rises from 1.3200 with US PCE inflation in sight

  • After Wednesday's decline, the pound sterling is rising again above 1.3200 against the US dollar.
  • Traders are focusing on core US PCE inflation data for July, which may influence market speculation about the extent of the Fed's rate cut.
  • Investors expect the BoE to cut interest rates again this year.

The Pound Sterling (GBP) is recovering from the key support level of 1.3200 against the US Dollar (USD) in the European session on Thursday. The GBP/USD pair is rising while the US Dollar (USD) is marginally lower following its strong rebound on Wednesday. The US Dollar Index (DXY), which tracks the greenback's value against six major currencies, is under pressure as it attempts to extend its recovery above the immediate resistance of 101.20.

The greenback is expected to struggle to maintain its recent recovery as the Federal Reserve (Fed) is almost certain to begin cutting interest rates starting at the September meeting. While traders are divided on whether the Fed will begin the easing phase with a 25 or 50 basis point (bp) cut, the rate cut is already fully priced in.

Speculation that the Fed may begin cutting interest rates in September is fueled by Fed Chair Jerome Powell's dovish comments on interest rates at the Jackson Hole (JH) Symposium last week. Powell said that “the time has come for a policy adjustment,” stressing that the U.S. central bank is now more concerned about downside risks to the labor market as inflation appears to be on track to return to the desired 2% rate.

Meanwhile, investors are awaiting the US Personal Consumption Expenditure Price Index (PCE) report for July, which is due to be released on Friday. The PCE report is expected to show that core inflation rose faster year-on-year at 2.7% compared to June's 2.6%, with the monthly figure growing steadily at 0.2%. The inflation data could significantly influence market speculation about the Federal Reserve's (Fed) monetary policy decision in September.

In Thursday's session, the UK economic calendar is empty, but investors will be focusing on plenty of US data. One of the key items is the second estimate of the second quarter gross domestic product (GDP) data, which is due out at 12:30 GMT. Economists expect the data to be unchanged, confirming that the US economy grew by 2.8% on an annual basis. The GDP data is unlikely to have a significant impact on the US dollar unless there is a significant revision. Apart from that, the weekly US unemployment figures are also due, which could move the markets in case of a significant increase.

Daily Market Drivers Overview: Pound Sterling Outperforms Major Counterparts

  • The pound sterling is performing strongly against its major currencies during European trading hours, excluding those in the Asia-Pacific region. The British currency remains stable as the Bank of England (BoE) is expected to initiate a gradual monetary easing cycle as victory over inflation in the United Kingdom (UK) is not certain.
  • BoE chief Andrew Bailey suggested in his speech at the JH symposium on Friday that the second-round effects of inflationary pressures would be smaller than expected, but also said the UK central bank should not rush into further rate cuts, Reuters reported. The BoE will “be careful not to cut rates too quickly or too much,” Bailey said.
  • BoE officials were reluctant to offer a pre-set rate cut path as inflation in the services sector remained high due to wage pressures. Looking ahead, sterling will be guided by market expectations for BoE rate cuts for the rest of the year, as there is no major economic data this week. Markets expect the BoE to cut its lending rates once again this year.

British Pound Price Today

The following table shows the percentage change in the British Pound (GBP) against major listed currencies today. The British Pound was strongest against the Euro.

GBP EUR USD EUR CAD AUD NZD CHF
GBP 0.27% 0.10% 0.15% -0.02% -0.19% -0.39% 0.25%
EUR -0.27% -0.17% -0.11% -0.28% -0.45% -0.66% -0.06%
USD -0.10% 0.17% 0.03% -0.12% -0.30% -0.51% 0.09%
EUR -0.15% 0.11% -0.03% -0.15% -0.34% -0.58% 0.08%
CAD 0.02% 0.28% 0.12% 0.15% -0.17% -0.39% 0.25%
AUD 0.19% 0.45% 0.30% 0.34% 0.17% -0.19% 0.44%
NZD 0.39% 0.66% 0.51% 0.58% 0.39% 0.19% 0.63%
CHF -0.25% 0.06% -0.09% -0.08% -0.25% -0.44% -0.63%

The heatmap shows the percentage changes of the major currencies relative to each other. The base currency is selected from the left column, while the quote currency is selected from the top row. For example, if you select the British pound from the left column and move along the horizontal line to the US dollar, the percentage change shown in the box corresponds to GBP (base)/USD (quote).

Technical Analysis: Pound Sterling finds support at 1.3200

The Pound Sterling is recovering after a minor corrective move and is approaching the 1.3200 round support level 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 the bullish momentum resumes, the Cable is expected to extend its upside move towards the psychological resistance at 1.3500 and the February 4, 2022 high of 1.3640 after breaking a fresh two-and-a-half-year high of 1.3266 against the US Dollar.

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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