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GBP/USD Forecast: Pound Sterling closes in on key support area ahead of US CPI

  • GBP/USD trades in negative territory near 1.3500 on Thursday.
  • The near-term technical outlook points to a bearish tilt in the short term.
  • August inflation data from the US will be watched closely by market participants.

After closing the day virtually unchanged on Wednesday, GBP/USD stays on the back foot early Thursday and trades in negative territory at around 1.3500. The pair faces a critical support level at 1.3470 as investors refrain from taking large positions ahead of August inflation data from the US.

Pound Sterling Price This week

The table below shows the percentage change of British Pound (GBP) against listed major currencies this week. British Pound was the weakest against the Australian Dollar.

USDEURGBPJPYCADAUDNZDCHF
USD0.23%-0.02%-0.19%0.38%-0.80%-0.60%0.13%
EUR-0.23%-0.26%-0.35%0.14%-1.02%-0.78%-0.11%
GBP0.02%0.26%-0.18%0.40%-0.76%-0.53%0.16%
JPY0.19%0.35%0.18%0.48%-0.65%-0.57%0.32%
CAD-0.38%-0.14%-0.40%-0.48%-1.07%-0.90%-0.25%
AUD0.80%1.02%0.76%0.65%1.07%0.23%0.92%
NZD0.60%0.78%0.53%0.57%0.90%-0.23%0.69%
CHF-0.13%0.11%-0.16%-0.32%0.25%-0.92%-0.69%

The heat map shows percentage changes of major currencies against each other. The base currency is picked from the left column, while the quote currency is picked from the top row. For example, if you pick the British Pound from the left column and move along the horizontal line to the US Dollar, the percentage change displayed in the box will represent GBP (base)/USD (quote).

Although the US Dollar (USD) came under bearish pressure with the immediate reaction to the weaker-than-expected Producer Price Index (PPI) data for August on Wednesday, the cautious market stance helped the currency find support and made it difficult for GBP/USD to gain traction.

During a meeting of government ministers on Wednesday, Britain's finance minister Rachel Reeves said that the government was focused on going further to support the Bank of England (BoE) in reducing inflation, controlling public spending and driving growth, Reuters reported, citing a Downing Street spokesperson. This headline failed to trigger a noticeable market reaction.

In the second half of the day, the Bureau of Labor Statistics (BLS) will publish the Consumer Price Index (CPI) data for August. On a monthly basis, the core CPI, which excludes volatile food and energy prices, is forecast to rise by 0.3%.

According to the CME FedWatch Tool markets are currently fully pricing in a 25 basis-points (bps) Federal Reserve (Fed) rate cut in September. Although the inflation data is unlikely to change markets' mind about next week's policy decision, it could influence the USD's valuation and the pair's action in the immediate term.

A soft print in the monthly core CPI could hurt the USD and help GBP/USD turn north. On the flip side, an increase of 0.5%, or higher, in this data could weigh on the pair.

GBP/USD Technical Analysis

The Relative Strength Index (RSI) indicator on the 4-hour chart declined below 50 and GBP/USD closed the last three 4-hour candles below the 20-period Simple Moving Average (SMA), reflecting a bearish tilt in the short-term bias.

On the downside, 1.3470-1.3460 (20-day SMA, 50-day SMA, Fibonacci 50% retracement of the latest downtrend) aligns as a key support level before 1.3445 (200-period SMA) and 1.3390-1.3400 (Fibonacci 38.2% retracement, static level). Looking north, resistance levels could be spotted at 1.3540 (Fibonacci 61.8% retracement) and 1.3590-1.3600 (static level, round level).

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.

Author

Eren Sengezer

As an economist at heart, Eren Sengezer specializes in the assessment of the short-term and long-term impacts of macroeconomic data, central bank policies and political developments on financial assets.

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