- The Pound Sterling has surged to approximately 1.3350 against the US Dollar, buoyed by the Greenback’s weakness following underwhelming US inflation figures for April.
- The US headline Consumer Price Index (CPI) registered a growth of 2.3%, marking its lowest point in over four years.
- Market participants are keenly awaiting the preliminary Q1 UK Gross Domestic Product (GDP) data, scheduled for release on Thursday, to gain further insights into the UK’s economic health.
The Pound Sterling (GBP) is extending its gains, trading near the 1.3350 level against the US Dollar (USD) during Wednesday’s North American trading session. The GBP/USD pair is building upon Tuesday’s recovery, as the US Dollar experiences further retracement in the wake of the weaker-than-anticipated United States (US) Consumer Price Index (CPI) data release for April on Tuesday. The softer inflation data has prompted a reassessment of the Federal Reserve’s potential monetary policy path.
The US headline inflation rate decelerated to 2.3% on a year-over-year basis, representing the slowest pace of increase since February 2021. The core CPI, which excludes the volatile components of food and energy prices, showed a steady growth of 2.8%, aligning with market expectations. On a monthly basis, both the headline and core CPI figures exhibited a more moderate growth rate of 0.2%. These figures suggest a potential cooling in inflationary pressures within the US economy.
From a technical perspective, these indications of moderating inflationary pressures could bolster expectations among traders for an interest-rate cut by the Federal Reserve (Fed). However, current market pricing suggests that expectations for the Fed to maintain interest rates at their current levels during the July meeting have remained largely unchanged since Monday, prior to the release of the US inflation data. This suggests that investors may be adopting a wait-and-see approach, seeking further confirmation of the disinflationary trend.
According to the CME FedWatch tool, the probability of the Fed holding interest rates steady within the current range of 4.25%-4.50% in July remains at 61.4%. This is a notable increase from the 29.8% probability observed last week, following the announcement of a substantial reduction in tariffs between the US and China. This shift in expectations highlights the complex interplay of factors influencing market sentiment regarding future monetary policy decisions.
Investors appear to have interpreted the trade agreement with China as a positive development for the US economic outlook, leading them to push back their expectations for interest rate cuts and partially offsetting the impact of the declining inflation figures. This suggests that broader economic considerations, such as trade dynamics, are also playing a significant role in shaping market expectations. Meanwhile, former US President Donald Trump continues to advocate for interest rate cuts, reinforcing his position in light of the decreasing prices of key goods.
“No Inflation, and Prices of Gasoline, Energy, Groceries, and practically everything else, are DOWN!!! THE FED must lower the RATE, like Europe and China have done,” Trump stated on Truth Social. Trump also criticized Fed Chair Jerome Powell for not implementing rate cuts: “What is wrong with Too Late Powell? Not fair to America, which is ready to blossom? Just let it all happen, it will be a beautiful thing!” Trump added, reflecting his continued pressure on the central bank to adopt a more accommodative monetary policy stance.
Daily digest market movers: Pound Sterling trades mixed ahead of UK Q1 GDP
- The Pound Sterling is exhibiting a mixed performance against its major counterparts on Wednesday, as investors reassess their expectations regarding the Bank of England’s (BoE) monetary policy outlook for the remainder of the year. This reassessment follows the release of the latest UK labor market data for the three months ending in March on Tuesday.
- The labor market data revealed a slowdown in job creation, an increase in the Unemployment Rate, and a deceleration in wage growth. These figures suggest that businesses may have scaled back their hiring activities in anticipation of the increase in employers’ contributions to social security schemes, which took effect in April. The data points to a potentially softening labor market in the UK.
- Conversely, the moderate growth observed in the Average Earnings data is expected to provide some reassurance to BoE officials. Policymakers closely monitor wage growth figures, as they are considered a significant driver of inflation within the services sector, a key factor contributing to the persistent price pressures in the United Kingdom (UK). The BoE is seeking evidence that wage growth is moderating to bring inflation under control.
- Despite the increasing hopes for a moderation in price pressures, BoE Chief Economist Huw Pill cautioned on Tuesday that inflation could continue to exceed expectations, potentially reinforcing the need to maintain higher interest rates for a longer period. “I remain concerned that we have seen a sort of structural change in price and wage-setting behaviour, maybe driven by the type of things that were involved in models of the inflation process from the ’70s and ’80s,” Pill stated during a conference at the London School of Economics, as reported by Reuters. His comments highlight the BoE’s ongoing concerns about the persistence of inflationary pressures.
- Looking ahead, the primary catalyst for the Pound Sterling will be the preliminary UK Q1 Gross Domestic Product (GDP) data and factory output figures, scheduled for release on Thursday. The UK economy is projected to have expanded by 0.6% in the first quarter of the year, representing an acceleration from the 0.1% growth recorded in the final quarter of 2024. A stronger-than-expected GDP figure could provide further support for the Pound Sterling.
Technical Analysis: Pound Sterling stays above 1.3300
The Pound Sterling is trading near 1.3350 against the US Dollar on Wednesday. The GBP/USD pair has moved back above the 20-day Exponential Moving Average (EMA), which is currently positioned around 1.3255, suggesting a potential shift back towards a bullish trend. This technical development could attract further buying interest in the Pound Sterling.
The 14-day Relative Strength Index (RSI) is currently oscillating within the 40.00-60.00 range, indicating a neutral momentum. A renewed bullish impetus would likely emerge if the RSI breaks above the 60.00 level, which could signal a stronger upward trend for the GBP/USD pair. Traders will be closely monitoring the RSI for confirmation of a potential breakout.
On the upside, the three-year high of 1.3445 represents a key resistance level for the pair. A successful breach of this level could pave the way for further gains. Conversely, on the downside, the psychological level of 1.3000 is expected to act as a significant support area, potentially limiting any substantial declines in the GBP/USD pair.
BoE FAQs
The Bank of England (BoE) is responsible for setting monetary policy in the United Kingdom. Its primary objective is to maintain ‘price stability’, which translates to a consistent inflation rate of 2%. The main tool the BoE uses to achieve this is adjusting the base lending rate. This is the rate at which the BoE lends to commercial banks, which in turn influences the rates at which banks lend to each other and, ultimately, the overall level of interest rates in the economy. These interest rate decisions have a significant impact on the value of the Pound Sterling (GBP).
When inflation exceeds the Bank of England’s target, the BoE typically responds by raising interest rates. This makes borrowing more expensive for individuals and businesses, which can help to curb spending and reduce inflationary pressures. Higher interest rates tend to make the UK a more attractive destination for global investors seeking higher returns, which can lead to increased demand for the Pound Sterling and a corresponding appreciation in its value. Conversely, when inflation falls below the target level, it often signals a slowdown in economic growth. In such cases, the BoE may consider lowering interest rates to make borrowing cheaper, encouraging businesses to invest in growth-generating projects. This can be a negative factor for the Pound Sterling, as lower interest rates may reduce its attractiveness to international investors.
In exceptional circumstances, the Bank of England may implement a policy known as Quantitative Easing (QE). QE involves the BoE significantly increasing the flow of credit within a struggling financial system. This is generally considered a last resort, employed when simply lowering interest rates is insufficient to achieve the desired economic outcome. The QE process entails the BoE creating new money to purchase assets, typically government or AAA-rated corporate bonds, from banks and other financial institutions. This injection of liquidity into the financial system aims to stimulate lending and investment. However, QE typically results in a weakening of the Pound Sterling, as the increased money supply can dilute its value.
Quantitative tightening (QT) represents the opposite of QE and is implemented when the economy is strengthening and inflation begins to rise. During QE, the Bank of England (BoE) purchases government and corporate bonds from financial institutions to encourage lending. In contrast, during QT, the BoE ceases to purchase additional bonds and stops reinvesting the principal payments received as the bonds it already holds mature. This gradual reduction in the BoE’s bond holdings effectively withdraws liquidity from the financial system. QT is generally considered a positive factor for the Pound Sterling, as it can lead to increased demand for the currency and a corresponding appreciation in its value.
