Pound Sterling holds onto gains against US Dollar ahead of US inflation data
- The Pound Sterling clings to gains near 1.2950 against the US Dollar ahead of the US CPI data for February on Wednesday.
- US President Trump’s tariff policies continue to cap investors' risk appetite.
- The BoE is expected to keep interest rates unchanged in the monetary policy meeting next week.
The Pound Sterling (GBP) stays firm near the four-month high of 1.2965 against the US Dollar (USD) in Wednesday’s European session. The GBP/USD pair clings to gains while the US Dollar gauges temporary support ahead of the United States (US) Consumer Price Index (CPI) data for February, which will be published at 12:30 GMT.
The US inflation data will significantly influence market speculation for the Federal Reserve’s (Fed) monetary policy outlook. On Friday, Fed Chair Jerome Powell said the central bank could maintain “policy restraint for longer if inflation progress stalls”.
Economists expect year-over-year headline inflation to have decelerated to 2.9% from 3% in January. In the same period, the core CPI – which excludes volatile food and energy prices – is estimated to have risen by 3.2% from the prior release of 3.3%. Both headline and core CPI are expected to have grown at a slower pace of 0.3% on a monthly basis.
Signs of easing inflationary pressures would boost expectations that the Fed could cut interest rates in the May policy meeting. According to the CME FedWatch tool, there is a 42% chance that the central bank will cut interest rates in May, an increase from 10.4% seen a month ago. On the contrary, sticky figures would diminish them.
Daily digest market movers: Pound Sterling stabilizes ahead of UK monthly GDP
- The Pound Sterling trades quietly against its major peers on Wednesday as investors look for fresh cues about next week’s Bank of England’s (BoE) monetary policy meeting. Traders are confident that the BoE will keep interest rates steady at 4.5% as a slew of officials have guided a ‘gradual and cautionary’ monetary easing approach.
- Last week, four BoE policymakers, including Governor Andrew Bailey, guided a gradual path for “unwinding monetary policy restrictiveness” as the inflation persistence is less likely to fade “on its own accord”. Contrary to them, BoE member Catherine Mann supports a swift policy-easing approach due to “substantial volatility” coming from financial markets, especially from “cross-border spillovers”.
- This week, investors will focus on the United Kingdom's (UK) monthly Gross Domestic Product (GDP), and Industrial and Manufacturing Production data for January, which will be released on Friday. The UK economy is expected to have grown at a moderate pace of 0.1%, compared to the 0.4% economic expansion seen in December. Monthly factory data is estimated to have declined in the first month of 2025.
- On the geopolitical front, US President Donald Trump’s tariff agenda continues to keep investors on their toes across the globe. Trump threatened to double tariffs on imports of steel and aluminum from Canada but scrapped his decision after Canada’s Ontario Premier, Doug Ford, agreed to roll back a 25% surcharge levied on electricity exported to the US.
- Comments from US Commerce Secretary Howard Lutnick in an interview with CBS on Tuesday indicated that Trump’s tariff is more a negotiation tactic to have the upper hand while closing deals with his trading partners. “Let the dealmaker make his deals,” Lutnick said.
Technical Analysis: Pound Sterling sees more upside above 1.2965
The Pound Sterling aims to extend its upside above the four-month high of 1.2965 against the US Dollar posted on Tuesday. The long-term outlook of the GBP/USD pair has turned bullish as it holds above the 200-day Exponential Moving Average (EMA), which is around 1.2695.
The 14-day Relative Strength Index (RSI) holds above 60.00, suggesting a strong bullish momentum.
Looking down, the 50% Fibo retracement at 1.2767 and the 38.2% Fibo retracement at 1.2608 will act as key support zones for the pair. On the upside, the psychological 1.3000 level will act as a key resistance zone.
Pound Sterling 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 unit for foreign exchange (FX) in the world, accounting for 12% of all transactions, averaging $630 billion a day, according to 2022 data. Its key trading pairs are GBP/USD, also known as ‘Cable’, which accounts for 11% of FX, GBP/JPY, or the ‘Dragon’ as it is known by traders (3%), and EUR/GBP (2%). The Pound Sterling is issued by the Bank of England (BoE).
The single most important factor influencing the value of the Pound Sterling is monetary policy decided by the Bank of England. The BoE bases its decisions on whether it has achieved its primary goal of “price stability” – a steady inflation rate of around 2%. Its primary tool for achieving this is the adjustment of interest rates. When inflation is too high, the BoE will try to rein it in by raising interest rates, making it more expensive for people and businesses to access credit. This is generally positive for GBP, as higher interest rates make the UK a more attractive place for global investors to park their money. When inflation falls too low it is a sign economic growth is slowing. In this scenario, the BoE will consider lowering interest rates to cheapen credit so businesses will borrow more to invest in growth-generating projects.
Data releases gauge the health of the economy and can impact the value of the Pound Sterling. Indicators such as GDP, Manufacturing and Services PMIs, and employment can all influence the direction of the GBP. A strong economy is good for Sterling. Not only does it attract more foreign investment but it may encourage the BoE to put up interest rates, which will directly strengthen GBP. Otherwise, if economic data is weak, the Pound Sterling is likely to fall.
Another significant data release 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 over a given period. If a country produces highly sought-after exports, its currency will benefit purely from the extra demand created from foreign buyers seeking to purchase these goods. Therefore, a positive net Trade Balance strengthens a currency and vice versa for a negative balance.