- The British Pound remains strong against the US Dollar as Fed rate cuts become appropriate this year.
- Softer-than-expected US inflation raises hopes for Fed rate cuts in September.
- The UK economy grew at a faster pace of 0.4% in May, beating the consensus of 0.2%.
The British Pound (GBP) is holding on to gains slightly above the 1.2900 round-mark against the US Dollar (USD) in Friday’s London session. The GBP/USD pair rose to a fresh yearly high of 1.2950 after the United States (US) Consumer Price Index (CPI) data for June came in softer than expected, raising expectations of rate cuts by the Federal Reserve (Fed). Traders are betting that the Fed will start cutting interest rates as early as the September meeting.
The U.S. CPI report showed that annual headline and core inflation, which excludes volatile food and energy prices, slowed to 3% and 3.3%, respectively. On a monthly basis, headline inflation deflated for the first time in four years, raising confidence that price pressures are on track to return to the desired 2% rate and that high inflationary pressures in the first quarter were a one-time event.
Softer than expected inflation readings have weighed heavily on the US Dollar and increased Fed officials’ confidence that the disinflation process has resumed. The Dollar Index (DXY), which tracks the value of the Greenback against six major currencies, remains on the defensive below 104.50.
On Thursday, San Francisco Fed President Mary Daly said recent cooler inflation readings and easing labor market conditions have made one or two rate cuts appropriate this year.
On Friday, investors will focus on the US Producer Price Index (PPI) data for June, due at 12:30 GMT. Economists expect headline and core producer inflation to have accelerated in June both on a monthly and annual basis.
Daily Market Wrap: Sterling strengthens on improving UK economic outlook
- The British Pound is showing great strength against its major peers on Friday. The British currency is strengthening as the outright victory of Keir Starmer’s Labour Party in the parliamentary elections has resulted in the most stable political conditions in the United Kingdom (UK) economy among the G-7 nations.
- The outlook for the British Pound has improved as a stable government results in predictable fiscal policies, which will attract significant foreign capital flows. Moreover, the new UK Chancellor, Rachel Reeves, is committed to stimulating growth and investment with a primary focus on the supply side due to the limited scope of government spending.
- Apart from that, the improving economic outlook and diminished expectations that the Bank of England (BoE) will start cutting interest rates in August have increased the attractiveness of the Pound. Monthly Gross Domestic Product (GDP) data for May came in higher at 0.4% versus estimates of 0.2% and an unchanged stance in April. This has also raised questions over whether the BoE should pivot towards policy normalisation in September.
- BoE policymakers are hesitant to support early rate cuts as wage growth is about twice as fast as needed to be consistent with achieving price stability. On Wednesday, BoE policymaker Catherine Mann warned that the decline in annual headline inflation to the 2% target was merely a “touch and go.” She warned that inflation could rise again and remain above the target rate for the rest of the year.
Technical Analysis: British Pound Breaks Out of Inverted H&S Formation
The British Pound is printing a fresh yearly high of 1.2950 against the US Dollar on Thursday. The GBP/USD pair is strengthening after a breakout of an inverted Head-and-Shoulders (H&S) pattern formed on a daily time frame. The neckline of the mentioned chart pattern is drawn near 1.2850, and a breakout of the H&S formation results in a bullish reversal.
The upsloping 20-day exponential moving average (EMA) near 1.2766 suggests that the short-term trend is bullish.
The 14-day Relative Strength Index (RSI) settled in the bullish range of 60.00-80.00, indicating that momentum has tilted to the upside.
The British Pound 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 currency unit in the world, accounting for 12% of all transactions and an average of $630 billion a day, as of 2022.
Its key currency pairs are GBP/USD, also known as the “Cable,” which accounts for 11% of the forex market, GBP/JPY, or the “Dragon” as it is known to traders (3%), and EUR/GBP (2%). The British Pound is issued by the Bank of England (BoE).
The most important factor influencing the value of the British Pound 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”, i.e. a stable inflation rate of around 2%. Its main tool for achieving this is the adjustment of interest rates.
When inflation is too high, the Bank of England tries to contain it by raising interest rates, making credit more expensive for individuals and businesses. 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 lowering interest rates to make credit cheaper, so that companies borrow more to invest in growth-generating projects.
The data released gauges the health of the economy and can influence the value of the Pound. 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 British Pound. Conversely, if economic data is weak, the British Pound is likely to fall.
Another significant indicator for the pound 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 who wish 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.
