|

GBP/USD Forecast: Pound Sterling looks vulnerable after soft inflation data

  • GBP/USD trades near 1.2900 in the European session on Wednesday.
  • Annual CPI inflation in the UK softened to 2.8% in February.
  • Technical sellers could take action in case 1.2880 support fails.

GBP/USD stays under bearish pressure in the European session on Wednesday and trades at around 1.2900. The pair could stretch lower in case 1.2880 support area fails.

British Pound 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 Canadian Dollar.

USDEURGBPJPYCADAUDNZDCHF
USD0.20%0.10%0.53%-0.73%-0.81%-0.43%0.06%
EUR-0.20%-0.21%-0.21%-0.90%-1.03%-0.58%-0.10%
GBP-0.10%0.21%0.41%-1.31%-0.84%-0.37%-0.00%
JPY-0.53%0.21%-0.41%-1.24%-1.34%-0.91%-0.47%
CAD0.73%0.90%1.31%1.24%-0.02%0.31%0.79%
AUD0.81%1.03%0.84%1.34%0.02%0.45%0.93%
NZD0.43%0.58%0.37%0.91%-0.31%-0.45%0.55%
CHF-0.06%0.10%0.00%0.47%-0.79%-0.93%-0.55%

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).

Pound Sterling weakens against its major rivals following the soft inflation readings from the UK.

The Office for National Statistics announced early Wednesday that the Consumer Price Index (CPI) rose 2.8% on a yearly basis in February. This reading followed the 3% increase recorded in January and came in below the market expectation of 2.9%. The core CPI, which excludes volatile food and energy prices, rose 3.5% in the same period, below analysts' estimate of 3.6%.

The UK's Office for Budget Responsibility (OBR) will publish its forecasts for the UK economy and Chancellor of the Exchequer Rachel Reeves will present the Spring budget on Wednesday.

Later in the day, February Durable Goods Orders data will be featured in the US economic docket. A significant negative surprise could weigh on the USD and help GBP/USD stage a rebound.

During the American trading hours, several Federal Reserve (Fed) policymakers will be delivering speeches as well.

GBP/USD Technical Analysis

The lower limit of the ascending regression channel and the 20-day Simple Moving Average (SMA) form a key support at 1.2880. In case GBP/USD falls below this level and fails to reclaim it, 1.2800 (200-day SMA) could be seen as the next bearish target.

On the upside, 1.2960 (50-period SMA) aligns as first resistance level before 1.3000 (static level, round level) and 1.3020 (mid-point of the ascending channel).

Inflation FAQs

Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.

The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.

Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.

Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it. Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.

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.

More from Eren Sengezer
Share:

Editor's Picks

AUD/USD eyes 100-SMA hurdle near 0.7035 as hawkish RBA counters firmer USD

AUD/USD regains positive traction on Tuesday and climbs to 0.7030 during the Asian session, reversing the previous day's corrective slide from a one-month high as hawkish RBA rate expectations continue to support the Aussie. Spot prices, however, remain below the 100-day SMA pivotal resistance amid a firmer US Dollar as traders brace for Australia’s September CPI report on Wednesday ahead of the Fed rate decision.

USD/JPY sticks to modest gains above 157.50 as traders await Fed, BoJ meetings

USD/JPY attracts buyers for the third straight day, recovering further from a one-month low ahead of Wednesday’s FOMC decision and the BoJ policy update on Friday. Meanwhile, expectations that the BoJ may hold off on aggressive rate hikes weigh on the Japanese Yen, and the US Dollar advances to a nearly two-week high, supporting the currency pair.

Gold bears flirt with $4,000 amid sustained USD buying ahead of FOMC decision

Gold meets with a fresh supply during the Asian session, stalling the previous day's modest bounce from the vicinity of a three-month low amid a firmer US Dollar. The precious metal, however, defends the $4,000 psychological mark as traders now seem hesitant and opt to wait for the outcome of the two-day FOMC policy meeting on Wednesday.

Pi Network stalls as weak crypto sentiment caps recovery

Pi Network (PI) holds steady above $0.0760 at press time on Tuesday, stalling after a roughly 2% rebound the previous day. The broader market's weak sentiment and reduced trading volume weigh on the PI token. The technical outlook is bearish, with price capped below a long-term resistance trendline and weak momentum.

France tests the Euro's nerve: What the OAT spread is telling FX traders
France's 10-year borrowing premium over Germany hit its widest since the 2011 debt crisis last week. With public spending above 57% of GDP, unrest on the streets and a presidential election next spring, cuts look unlikely. If Paris cannot trim, the bill may be paid quietly through financial repression.
What November 3 means for the Fed's rate path and the US Dollar

The USD faces a decisive period ahead of the November 3 midterm elections. While markets anticipate another interest rate increase from the Fed in December, the battle for control of Congress could reshape fiscal policy expectations and, indirectly, the path of US monetary policy in 2027.