GBP/USD Forecast: Pound Sterling needs to confirm 1.2550 as support to attract bulls

Pound Sterling struggles to build on Monday's gains.
The Unemployment Rate in the UK edged higher to 4.3% in the three months to March.
Focus shifts to US PPI data and Fed Chairman Powell's speech.

Eren Sengezer FXStreet

GBP/USD is having a difficult time gaining traction after rising nearly 0.3% on a daily basis on Monday. Ahead of the US producer inflation data and Federal Reserve (Fed) Chairman Jerome Powell's speech, the pair trades in a narrow band at around 1.2550.

The data published by the UK's Office for National Statistics showed early Tuesday that the ILO Unemployment Rate edged higher to 4.3% in the three months to March from 4.2%. This reading came in line with analysts' estimate. Annual wage inflation, as measured by the change in the Average Earnings Including Bonus, held steady at 5.7% and beat the market expectation of 5.3%. Nevertheless, the mixed data failed to provide a boost to Pound Sterling.

Pound Sterling FAQs

What is the Pound Sterling?

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, aka ‘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).

How do the decisions of the Bank of England impact on the Pound Sterling?

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.

How does economic data influence the value of the Pound?

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.

How does the Trade Balance impact the Pound?

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.

The US Bureau of Labor Statistics will release the Producer Price Index (PPI) data for April in the early American session on Tuesday. Investors expect the PPI ex Food & Energy to rise 0.2% on a monthly basis. A monthly increase of more than 0.3% in the core PPI could help the USD stay resilient against its rivals. On the other hand, a reading below the market consensus could weigh on the currency and help GBP/USD push higher. Ahead of Wednesday's Consumer Price Index (CPI) data, however, the market reaction could remain short-lived.

In the second half of the day, Fed Chairman Powell will appear at a moderated discussion with De Nederlandsche Bank (DNB) President Klaas Knot at the Foreign Bankers' Association's Annual General Meeting in Amsterdam. If Powell notes that they will stick to restrictive policy stance for longer than anticipated, investors could refrain from pricing in a rate cut in September and allow the USD to outperform its rivals. The CME FedWatch Tool shows that markets see a less than 40% chance that the Fed will keep the interest rate unchanged in September.

GBP/USD Technical Analysis

The 20-day and the 200-day Simple Moving Averages (SMA) form a pivot level at 1.2550. GBP/USD could attract bulls once it stabilizes above this level and starts using it as support. In this scenario, 1.2590-1.2600 (Fibonacci 50% retracement of the latest downtrend, psychological level) and 1.2635 (May 3 high) could be set as next targets.

On the downside, supports are located at 1.2500 (psychological level, 100-period SMA on the 4-hour chart), 1.2450 (Fibonacci 23.6% retracement) and 1.2400 (static level, psychological level).

Economic Indicator

Fed's Chair Powell speech

Jerome H. Powell took office as a member of the Board of Governors of the Federal Reserve System on May 25, 2012, to fill an unexpired term. On November 2, 2017, President Donald Trump nominated Powell to serve as the next Chairman of the Federal Reserve. Powell assumed office as Chair on February 5, 2018.

AUD/USD rises to 0.6950 as USD slips on Fed's Warsh

AUD/USD regains traction and extends the bounce toward 0.6950 in the Asian session on Friday. Fed Chair Warsh's comments reinforce the selling pressure on the US Dollar, allowing the pair to stretch higher. Warsh said that he remains committed to delivering price stability without giving away anything on future interest rate path.

USD/JPY falls in symc with USD, gives up 158.00 after Warsh's speech

USD/JPY has come under fresh selling pressure and gives up 158.00 in the Asian session on Friday amid the emergence of fresh US Dollar selling. Fed Chair Warsh's non-committal commentary on the future tightening path, weighs on the US Dollar and the pair.

Gold looks vacillating above $4,150

Gold alternates gains with losses below the key $4,200 mark per troy ounce on Friday. The yellow metal’s irresolute price action comes in response to a modest pullback in the US Dollar and a tepid recovery in US Treasury yields across the board.

Bitcoin steadies at $82,000: The five forces crushing the Uptober rally

Crypto markets have remained under pressure so far in October, with Bitcoin (BTC) sliding below $80,000 earlier this week before recovering to around $82,000 on Friday, as macroeconomic headwinds and cooling demand weigh on the market.

The Fed just got a second hot inflation number. Here's what the diesel signal is really saying

The Federal Reserve (Fed) faces a renewed inflation challenge after two consecutive reports showed price pressure intensifying across the US economy. September's Consumer Price Index (CPI) confirmed accelerating consumer inflation, while the Producer Price Index (PPI) revealed an even sharper rise in business costs. Behind both reports lies a common factor: energy prices.

Everyone's dumping Gold after hot US inflation. Here's why $4,100 could be a floor, not a cliff

Gold (XAU/USD) is recovering from a sharp sell-off triggered by hotter-than-expected United States (US) inflation data released on Wednesday. The precious metal briefly plunged toward $4,073 as investors increased their bets on further Federal Reserve (Fed) interest rate hikes before recovering as US Treasury yields and the US Dollar (USD) reversed their initial gains.