- The British Pound faces pressure near 1.3400 against the US Dollar ahead of the US PCE inflation data for August.
- Market expectations for a 50 basis point Fed rate cut in November have eased slightly.
- The BoE is expected to cut interest rates once in the last quarter of the year.
The British Pound (GBP) continues to face selling pressure near the 1.3400 round level resistance against the US Dollar (USD) in the London session on Friday. The GBP/USD rally appears to have stalled as investors focus on the United States (US) Personal Consumption Expenditure (PCE) Price Index data for August, due out at 12 :30 GMT.
It is estimated that the index PCE US core inflation, the Federal Reserve’s (Fed) preferred inflation indicator, has grown 2.7% year-on-year, faster than the 2.6% increase seen in July, while monthly prices are expected that have grown steadily by 0.2%.
The data is likely to influence market speculation about the Fed’s interest rate cuts in November. Markets are almost equally divided on whether the US central bank will cut rates again by 50 basis points or by a smaller 25 basis points.
According to the CME FedWatch tool, the probability that the Fed will cut interest rates by 50 basis points in November has fallen to 51% from 57% on Thursday. If the PCE data showed signs of a further slowdown in inflationary pressures, market expectations of a large rate cut would increase. On the contrary, high inflation figures would weaken the possibilities of this scenario.
The importance of US inflation data has diminished recently as Fed officials appear confident that price pressures will return to the bank’s 2% target. Additionally, policymakers have become more vigilant about labor market risks. Last week, the Fed kicked off the policy easing cycle with a larger-than-usual interest rate cut of 50 basis points (bps) to 4.75%-5.00%, signaling that officials would do whatever was necessary to revitalize the strength of the labor market.
Daily Market Summary: Sterling Looks Set for Another Week of Gains
- The British pound performs weakly against its major peers, except Asia-Pacific currencies, on Friday. The British currency weakens as investors turn cautious ahead of PCE inflation data.
- There is no top-level economic data from the United Kingdom (UK) this week or next. Therefore, the GBP will be influenced by market expectations about the Bank of England’s (BoE) monetary policy action for the rest of the year.
- Financial market participants expect the BoE to cut interest rates once at either of the two remaining policy meetings this year. The BoE pivoted towards policy normalization with a 25 bps rate cut in August to 5%, but left rates unchanged at its meeting last week.
- On Tuesday, BoE Governor Andrew Bailey said in an interview with the Kent Messenger newspaper that “the path for interest rates will be downwards, gradually,” Reuters reports. Bailey’s comments suggest he is confident inflation will sustainably return to the bank’s 2% target. He did not provide a specific neutral rate, but assured that they will not return to the historical lows seen in times of pandemic.
Technical Analysis: Sterling struggles to rise above 1.3400
The British Pound falls as it struggles to extend its rise above the key resistance of 1.3400 against the US Dollar in European trading hours. The GBP/USD pair faced selling pressure after recording a new more than two-year high above 1.3430. Cable’s near-term outlook remains firm as the 20-day EMA near 1.3235 is tilted higher.
In early September, Cable strengthened after recovering from a corrective move near the trend line drawn from the December 28, 2023 high of 1.2828, from where it delivered a sharp rise after a breakout on August 21.
The 14-day Relative Strength Index (RSI) is trending lower but remains above 60.00, suggesting active bullish momentum.
Looking up, 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 the British Pound bulls.
The British Pound FAQs
The British Pound (GBP) is the oldest currency in the world (886 AD) and the official currency of the United Kingdom. It is the fourth most traded currency unit in the world, with 12% of all transactions and an average of $630 billion per day, according to 2022 data.
Its key currency pairs are GBP/USD, also known as “Cable”, which represents 11% of the forex market, GBP/JPY, or the “Dragon” as it is known to traders (3%), and EUR/GBP (2%). The pound sterling is issued by the Bank of England (BoE).
The most important factor influencing the value of the Pound Sterling is the monetary policy decided by the Bank of England. The Bank of England bases its decisions on achieving its main objective of “price stability”, that is, a stable inflation rate of around 2%. Its main tool to achieve this is the adjustment of interest rates.
When inflation is too high, the Bank of England tries to contain it by raising interest rates, which makes access to credit more expensive for individuals and companies. This tends to be 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 lowering interest rates to make credit cheaper, so that companies borrow more to invest in projects that generate growth.
The published data gauges the health of the economy and may influence the value of the Pound sterling. Indicators such as GDP, manufacturing and services PMIs, and employment can influence the direction of the Pound.
A strong economy is good for the British pound. Not only does it attract more foreign investment, but it may encourage the Bank of England to raise interest rates, which will directly strengthen the Pound. Otherwise, if economic data is weak, the pound is likely to fall.
Another significant data 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 during a given period.
If a country produces highly sought-after exports, its currency will benefit exclusively from the additional demand created by foreign buyers wishing to purchase these goods. Therefore, a positive net trade balance strengthens a currency and vice versa for a negative balance.
Source: Fx Street
I am Joshua Winder, a senior-level journalist and editor at World Stock Market. I specialize in covering news related to the stock market and economic trends. With more than 8 years of experience in this field, I have become an expert in financial reporting.
